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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 2021 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.
Good morning, and welcome to American Equity Investment Life Holding Company's conference call to discuss fourth quarter and full year 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 Axel Andre, Chief Financial Officer. Some of our comments will contain forward-looking statements indicated by terms such as anticipate, assuming, believe, calls for, can, continue, estimate, expect, forward, future, goal, intend, likely, look to, may need, on track, over time, plan, potential, project, ramp, should, signal, strategy, target, then, to be, towards, trims, will and would. Our actual results could significantly differ due to many risks, including the risk factors in our SEC filings. An audio replay will be made available on our website shortly after today's call. It is now my pleasure to introduce Anant Bhalla.
Thank you, Julie. Good morning and thank you all for your interest in American Equity. I want to share with you about the progress made in each element of the AEL 2.0 strategy as we have become what we now refer to internally as the New AEL. In the fourth quarter, we completed the building blocks of the AEL 2.0 strategy, setting the stage for us to scale in the coming years, thereby growing shareholder returns and value returns by migrating to the capital-efficient business model and more predictable fee-like earnings we envision as a new AEL. As a reminder, the AEL 2.0 strategy begins with a virtuous flywheel to describe our business. The virtuous flywheel starts with an industry-leading at-scale annuity origination platform. Our fundraising abilities through our industry-leading liability origination platforms allow us to be an investment manager with expertise in both liability-driven asset allocation and to manage an open architecture investment platform that can source a wide variety of differentiated investments. Finally, the strategy calls for the build-out of capital structuring and reinsurance capabilities to then attract third-party risk-bearing capital to our business, either for access to AEL's at-scale liability origination, or for access to both our differentiated asset allocations and our attractive cost of funding liabilities through reinsurance vehicles. Our team worked extraordinarily hard throughout the year. And in 2021, we accomplished all the business building goals for the past year that we presented to you in October of 2020. For go-to-market, we delivered a complete refresh of our general account product suite. We gained relevance and growth in our independent marketing organization or IMO distribution channel, and expanded further into banks and broker-dealers through Eagle Life while adding talent to enhance product innovation and economics. We added two new proprietary indices to our refreshed Asset Shield product and introduced two brand-new products to our lineup, Estate Shield and Flex Shield at American Equity Life. At Eagle Life, we added new client crediting strategies and completely refreshed select income focus. As Eagle Life's growth income product sales in the independent broker dealer channel, this product is a prime candidate for accelerating the growth in new business transferred to reinsurance vehicles to fuel growth of fee-like capital-efficient earnings in the coming years. I'll talk more about sales results for the fourth quarter in a bit. But through the first nine months of 2021, we moved back into the top five for FIA sales in the IMO channel and were just shy of the fourth spot for the third quarter sales, while writing higher-quality FIA, or fixed index annuity business, as measured by conversion from traditional spread return on equity or ROE earnings to a more capital-light return on assets or ROA mix. More on this aspect in a few minutes. Our investment management pillar is built to the point that it will now deliver risk-adjusted yields and results as expected and on schedule. I'll share some more specifics on this before getting into investment results for the quarter. First, in the area of core fixed income, the migration of our existing portfolio to BlackRock has gone exceedingly well. We have insourced the broader capabilities of BlackRock not only in core fixed income investment management, but also in strategic asset allocation and investment technology and continue to find new ways to partner with BlackRock to redefine insurance asset management. Our relationship is much more integrated and interactive and a purely traditional investment management agreement. In the fourth quarter, Jim Hamalainen and team delivered successfully as BlackRock took over management of over $45 billion of assets in October, including $7.6 billion of cash and equivalents. In the first half of 2022, we expect to move assets to our second partner for core fixed income investments, Conning Asset Management, especially focused on our newly formed Bermuda subsidiary. Migrating our core public fixed income portfolio to BlackRock and Conning will help us attain better net yields in core fixed income while allowing us to focus in areas where we can have industry-leading expertise like private assets, derivative trading, differentiated strategic asset allocation and asset liability management. Second, in the area of private asset investing, we now have seven sleeves of private asset sectors in which we have conviction, specifically as a landlord in both single-family rental and multifamily apartments, residential home loans for both individuals and professional investors, infrastructure debt, infrastructure equity with a priority around certain subsectors like energy transition, middle market loans to private companies, and annual recurring revenue-based lending to companies in the software and technology sector, or STAR. As I approach my two-year anniversary as CEO at the end of this month, I am proud of all the business building efforts we have accomplished as a team, especially in investment management. It has allowed us in 2021 to deploy $3.4 billion in private assets, well above our plan of $1 billion to $2 billion of private assets for the year, with expected returns in the 5.1% to 5.2% range. In aggregate, we successfully repositioned the portfolio in 2021 with close to $10 billion of new asset purchases, resulting in an estimated portfolio yield of 3.85% at the end of the year. We are on track to achieve close to or above 4% aggregate portfolio yields in 2022 as we further ramp our allocation in private assets from approximately 15% at year-end 2021 to 30% to 40% over time. With this, we will deliver earnings growth, allowing AEL shareholders to realize the full potential of differentiated asset management with potentially a lower risk profile than other alternate business models. Finally, in the fourth quarter, we worked with our residential real estate investment asset manager, Pretium, to close its acquisition of the Anchor Loans platform. This was an opportunistic extension of our macro investment thesis in residential real estate, where there is a massive supply-demand gap created due to underbuilding since the great financial crisis over 12 years ago. Founded in 1998, Anchor Loans was one of the first institutional lending platforms built to serve the diverse financing needs of professional residential real estate investors. Over the last two decades, Anchor Loans has grown to become the nation's leading capital provider to experienced residential real estate sponsors through its bridge and construction products. Anchor Loans serves a professional customer base where 95% of loans have historically been made to establish borrowers who have completed more than 40, 4-0 projects. This platform serves the need for bridge and construction loans in the residential credit space in which there are limited number of at-scale originators with a strong credit underwriting culture. It is a great example of how the capital of AEL, coupled with its new DNA for investment business building, can be supportive of others within the AEL ecosystem. In this case, Pretium, to further expand its asset management business while sourcing attractive assets for us. We were able to access residential mortgage loans to earn 200 to 300 basis points risk-adjusted spread premium to public investment-grade RMBS while also providing significant downside protection. We have an asset sourcing forward flow arrangement with Anchor for multiple years. We are actively looking to replicate such inorganic opportunities across all of our target private asset classes. The goal is to leverage our ability to offer flexible capital solutions for opportunities that have the potential for similar risk-adjusted returns. With this transaction, we have demonstrated an ability to move quickly for the right opportunity. Now we have numerous world-class investors reaching out to us in order to partner and be part of the AEL ecosystem as they see the virtuous flywheel in action. We are considering exploring opportunities across real estate, infrastructure, private credit and specialty finance where we can commit $250 million to over $1 billion of investment capital per transaction. Moving onto our capital structure strategy pillar, I am pleased to announce that we achieved all of our stated goals in this area in 2021. I am happy to note that we received all necessary regulatory approvals and more importantly, have built strong relationships with our regulators. We will continue to expand and explain the merits of AEL 2.0 business model, especially when it comes to the use of reinsurance, as a strategic differentiator for both risk control and to invite in third-party capital to partner with us, enabling the transformation of our business model into a capital-light operation as measured by the growth in ROA business with the increase in reinsured liabilities. Let me elaborate further in four specific areas of achievement in 2021. First, our reinsurance partnership with Brookfield Reinsurance is working well. This will provide us capital support to grow new business in our core strength of originating long duration fixed index annuities with lifetime income benefits and will transform those products from a return on equity through spread earnings to a return on assets through fee business model. Business ceded to Brookfield Reinsurance provides a stable, predictable multiyear earnings stream that should trade at a higher multiple for investors than traditional insurance. The notional value subject to recurring fees under the Brookfield Reinsurance agreement grew by $183 million to a total of $4.1 billion as of yearend 2021. In 2022, we expect around 1/3 of new business flow to transform into ROA business through growth in reinsured liabilities. In the coming years, we plan to migrate a majority of new business flow to the ROA side. The Brookfield Reinsurance partnership is a prime example of this ROE to ROA transformation in action. Second, in the fourth quarter, we completed the build-out of our reinsurance platform with the life venture of AEL RE Bermuda effective December 31 and the transfer of $4 billion of in-force business supported by approximately $300 billion of capital on a Bermuda regulatory basis. This accomplishment is significant because it is the first time American Equity has established an offshore reinsurance subsidiary, putting us on a level playing field with many of our largest competitors. The creation of AEL RE Bermuda gives our company three important benefits. One, a presence in highly credible offshore regulatory jurisdictions that allow for greater asset liability matching flexibility, which will allow us to optimize our investment portfolio through a higher allocation to privately sourced assets; two, it will allow us to free up capital at the Iowa subsidiary on an NAIC statutory basis, consistent with the more principal-based regulatory regime in Bermuda. And three, most importantly, we will develop the infrastructure, oversight, personnel, local management, finance, IT and the like, which can be leveraged to create newer entities similar to AEL RE Bermuda with which we will attract third-party capital. We expect to set up multiple offshore reinsurance entities commonly referred to as sidecars to invite third-party capital to partner with us. AEL will manage these vehicles, controlling the risks involved versus traditional third-party reinsurance that is prevalent in the industry, and earn ROA fees. To the creation of sidecars, we will customize the asset allocation and liability mix to match the risk return appetite for reinsurer equity investors, thereby connecting long-term equity capital with long-term insurance liabilities further powered by the differentiating elements of AEL's three strategic pillars. Third, we've completed the refinancing of redundant statutory reserves on our lifetime income benefit riders with an explicit fee this quarter with the transaction closing retroactive to October 1. With the closing of the refinancing, we realized positive capital impact of an estimated 23 points of risk-based capital and saved approximately $9 million per quarter pretax compared to the prior financing arrangement. The completion of the refinancing did lead to an actuarial assumption revision on a GAAP basis which Axel will address in his remarks. Finally, our strategic cornerstone relationship with Brookfield Reinsurance continues to grow stronger. Brookfield received formal approval to increase its equity stake in the Company in December and subsequently in early January, executed on the second tranche of the equity investment in AEL by purchasing 6.775 million shares at $37.33 bringing its ownership to 16% as of the time of the purchase. With the necessary regulatory approvals completed for Brookfield, we have restarted our share repurchase program in 2022, and through February 15, had purchased $100 billion worth of shares at an average price of $41.90 and expect to remain active buyers of our stock in 2022. We have a strong capital position generated by our reinsurance strategies and business model evolution and substantial cash at the holding company and access to available capital at the holding company. This will allow us to further scale our allocation into higher-returning private assets to grow earnings, opportunistically explore inorganic opportunities to accelerate asset origination while returning capital to shareholders. In summary, 15 months ago, we outlined the AEL 2.0 strategy, and in 2021, we have executed all the proof points for the fundamental building blocks. The new AEL is now built, and the next few years, our strategic focus is on three key elements. First, scaling our allocation to private assets, including through inorganic block deals; second, growing the amount of reinsured liabilities to AEL established reinsurance cycles to grow ROA earnings. And finally, writing new business that converts from traditional spread ROE model to a fee-like ROA earnings model through reinsurance. Hence, AEL has established the building blocks to turbocharge the right kind of growth to be the leading franchise in the asset-intensive insurance business. Going forward, we expect to reap the financial benefits from this further scaling of the strategy. Moving onto business results for the quarter, we continue to see positive momentum in both new business sales and investment results. Sales results were strong in fixed index annuities. Although total sales of $1.04 billion were down 20% versus the third quarter of 2021, FIA sales increased 7% sequentially to $982 million. We expect this result will be better than the overall market. For the year, our FIA sales increased 48% to $3.5 billion, reflecting the success of our go-to-market initiatives within the context of an improving sales environment. Total sales of $6 billion for the year were at the high end of our guidance. At American Equity Life, total sales through the IMO channel were $828 million in the quarter. Of this, fixed index annuity sales increased 11% sequentially to $806 million from $728 million as the refreshed Asset Shield team continues to gain momentum. Income Shield sales rose 7% sequentially. FIA sales at Eagle Life of $176 million represented a 6% decrease versus the third quarter of 2021, but a 66% increase compared to the year ago quarter. Although FIA sales at Eagle Life were down sequentially, we continue to see improved income product sales, albeit of a small base, as sales of income select focus -- sorry, of Eagle Select Focus income were up approximately 18% over the third quarter of this year and accounted for about 22% of total FIA sales. As planned, single premium deferred fixed annuity or SPDA sales were down 89% compared to the third quarter as we cut crediting rates on new business in the quarter in order to focus our pivot in Eagle Life to our core bread and butter long-duration FIA products. We believe these products align well with the transformation of AEL from a spread ROE insurer to more of a fee-based ROA company with respect to new business. Investment yields for the quarter were 3.8%. The new money investment yield in the quarter was 3.51%, but it is weighed down by the large amount of core fixed income investments that were made on behalf of us by BlackRock, restructuring the portfolio and putting excess cash to work. However, during the fourth quarter, we invested $2.3 billion in privately sourced assets at an expected return of 5.29%. These investments included $1.1 billion of short-term residential mortgages through our new relationship with Anchor. Excluding notable items associated with actual resumption revisions, we reported non-GAAP operating income of $97.1 million or $1.04 per share. Financials benefited from solid investment results. With that, I'll turn the call over to Axel.
Thank you, Anant. Let me extend my appreciation to all of you attending this call. For the fourth quarter of 2021, we reported non-GAAP operating income of $75.8 million or $0.81 per diluted common share. Financial results for the quarter reflect notable items associated with actual assumption revisions of $21.2 million after tax or $0.23 per diluted common share. For the full year 2021, non-GAAP operating income was $290.5 million or $3.07 a share. Full year operating results were negatively affected by notable items associated with actual assumption revisions, totaling $78 million after tax or $0.83 per diluted share. Full year operating results also reflected the high level of liquidity held in the insurance company investment portfolio as a result of de-risking the investment portfolio in late 2020 and early 2021 and in anticipation of reinsurance transactions prior to scaling into private assets and executing on the migration of core fixed income to BlackRock and Conning. As noted at the start of the year, due to the sequence of events and AEL exercising prudence to ensure execution certainty, 2021 was expected to be a transitional year for financial results. On a pretax basis, the effect of the fourth quarter 2021 actuarial assumption revisions before the change to earnings pattern resulting from these revisions, increased amortization of deferred policy acquisition costs and deferred sales inducements by $16 million and increased the liability for future payments under lifetime income benefit riders by $11 million for a total decrease in pretax operating income of $27 million. The actual adjustments to amortization of deferred policy acquisition costs and deferred sales inducements primarily reflects a $12 million pretax adjustment from the refinancing of redundant reserves effective October 1. While the annual cost of the new financing is less than that of our previous facility, we have increased the size of the facility by adding cohorts not previously included and lengthened its tenure from 12 to 30 years. This results in a higher present value of total expense over the life of the agreement, lower as expected gross profits and leads to a retrospective increase in the DAC amortization rate. Other model refinements led to an additional $11 million increase in the liability for future payments under lifetime income benefit riders and a $4 million increase in amortization of deferred acquisition and deferred sales inducements cost. Previously, our modeling had assumed that policyholders elected to move from accumulation to income on anniversary dates. We are now assuming the policyholders will elect throughout the calendar year. Even if the total expected payments are unchanged, the effect is an acceleration of model payments and an increase in the present value of benefits paid in excess of account value, i.e., the timing of cash flow changes. Secondarily, the acceleration of auto payments results in a lower forecast investment spread and gross profits, which resulted in the $4 million increase in DAC and DSI amortization. The effect of the model refinement on future earnings is expected to be minimal. The quarter included $8 million of revenues from reinsurance stemming from our Brookfield Reinsurance relationship, up from $7.6 million in the third quarter. In the fourth quarter, we ceded $201 million of new flow deposits with a notional value of $183 million. These result in recurring type revenues which are expected to grow over time as we migrate liabilities to the ROA business model. Average yield on invested assets was 3.80% in the fourth quarter of 2021 compared to 3.91% in last year's third quarter. The decrease was attributable to a decline in partnership income, lower realized income on other fair value assets, and higher investment expenses partially offset by lower cash balances and the ramp-up in private assets. Cash and equivalents in the investment portfolio averaged $4.8 billion over the fourth quarter, down from $7 billion in last year's third quarter. At year-end, we still had $2.6 billion of cash and equivalents in the investment portfolio and are currently down to $1 billion, at the high end of our target of $500 million to $1 billion, in line with our stated target portfolio allocation of 1% to 2% to cash and equipment. The aggregate cost of money for annuity liabilities was 151 basis points, flat with the third quarter. The cost of money in the fourth quarter benefited from 14 basis points of hedging gains compared to 8 basis points of hedging gains in the third quarter. The increase in the cost of money, excluding hedging gains, reflects an increase in the cost of options in the fourth quarter of 2021 due to changes in volatility and the runoff of lower cost options purchased in the third quarter of 2020. Cost of options in the fourth quarter of 2021 averaged 159 basis points compared to 150 basis points in the third quarter. In January, we began to take renewal rate actions that we expect to lower the cost of options by approximately 5 basis points all else equal. Investment spread in the fourth quarter was 229 basis points, down from 240 basis points for the third quarter. Excluding prepayment income and hedging gains, adjusted spread in the fourth quarter was 203 basis points compared to 220 basis points for the third quarter, with the decline reflecting a more normal level of returns in investment partnerships and other fair value assets compared with the very high returns we saw in the third quarter. In line with yield, we will anticipate our investment spread, excluding the high levels of prepayment income and hedge gains to rise, all else equal, now that excess cash has been substantially redeployed and the private assets ramp continues. Should the yields available to us decrease or the cost of money rise, we have the flexibility to reduce our rates, if necessary, and could decrease our cost of money by roughly 63 basis points if we reduce current rates to guaranteed minimums, up from 58 basis points on our third quarter call. Excluding the effect of assumption revisions, the liability for guaranteed lifetime income benefit payments increased $56 million this quarter after net positive experience and adjustments of $7 million relative to our modeled expectations. The better-than-expected result primarily reflected the benefit from high index credits in the quarter, offset in part by lower lapsation in certain policy blocks and higher-than-modeled LIBR election in certain cohorts. Excluding the effect of assumption revisions, deferred acquisition costs and deferred sales inducement amortization totaled $113 million, $9 million less than modeled expectation due to the strong index credits in the quarter, offset partly by higher-than-modeled interest margins. Our modeled expectation for DAC and DSI amortization for the in-force block for the first quarter of 2022 is in the $126 million range, reflecting an increase in interest margin relative to our fourth quarter expectation. Other operating costs and expenses were $66 million in the fourth quarter, up from $57 million in the third quarter. Operating costs in the fourth quarter reflected the expected savings from the completion of our redundant reserve financing, but also included $7 million of true-ups and accruals, primarily due to higher incentive plan expense as we successfully executed the AEL 2.0 strategy. As 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 expect an appropriate level of other operating expenses to run in the $60 million range per quarter for the foreseeable future. At December 31, cash and equivalents at the holding company were in excess of targets by approximately $260 million and currently stand at approximately $420 million in excess of target. Yesterday evening, we filed an 8-K with the SEC announcing that we have closed on a $300 million term loan to the holding company. The loan is currently undrawn, but represents a significant increase in dry powder to support our robust capital return and growth plans. The risk-based capital ratio at yearend for American Equity Life is estimated in the range of 390% to 400% and includes absorbing the effect of approximately 19 points due to the new C1 bond factors. We estimate significant capital redundancy at the A level on both an A.M. Best BCAR and S&P capital model basis. And now, I'll turn the call over to the Operator to begin Q&A.
Thank you. [Operator Instructions] Our first question comes from Pablo Singzon with JPMorgan. Your may proceed with your question.
My first question is for Anant on third-party capital. I guess is the intent there to raise capital for in-force blocks that you already have or to basically keep the sidecars funded by third-party capital? My understanding is that in-force blocks might be more like Brookfield or maybe make the trade-off between lower dollar but higher quality earnings. On the other hand, new business blocks will represent incremental economics to AEL and perhaps be more available in that respect. Just wanted to get your thoughts there, then I have one follow-up. Thank you.
Hi, Pablo, nice to hear your voice. Great question. No, it will be both in-force and new business that will go to sidecars. Obviously, we think new business being funded by sidecars makes us basically capitalized for growth so we can turbo-charge growth of new business, but there's in-force opportunities as well. We put $4 billion in our own Bermuda company. If someone wants to call us and buy an equity stake in it, give us a call. Otherwise, we'll find another in-force block you like and add the right new business mix to it.
Got it. And just on the new business, a part of the third-party business, I'd be curious to hear your thoughts on your ability to raise liabilities for those vehicles I guess from a distribution and product standpoint. In the context that I think other companies that have these focus more in institutional business as opposed to retail because it's easier to get meaningful amounts of AUM upfront. I guess if you think about new business, do you have to build on your retail capabilities like maybe doing in-force reinsurance? Or maybe would you even have to expand something like PRD? Thank you.
Yes. What we have built with AEL 2.0 and as we scale and deliver financial results, it's going to make some of our peers in the insurance sector wonder if they should call us up and figure out a way to reinsure to us and get access to what we could create. I do think us getting -- being able to wholesale originate, if I may use that term, is definitely on the cards. But our own retail origination of long-duration products to our asset allocation is very meaningful, and we want to grow that. Both opportunities are there with a focus on general account annuities. Does that help answer your question?
Yes. Thanks, Anant.
Thank you. Our next question comes from Erik Bass with Autonomous Research. Your may proceed with your question.
First on the expenses, can you just provide a little bit more color on what's changed your outlook going forward? I think you're talking about $10 million higher of run rate expenses. And are any of these kinds of discrete investments that will eventually fall off? Or is this more of a trendable rate?
Sure. Eric, this is Axel. Happy to take your question. Yes, look, I think we continue to build on our capability to support the growth and transformation of AEL. We're not completely done yet in terms of hiring of specialized talent that can help us deliver and execute. And in addition, we will also be investing in projects, essentially project expenses that get capitalized and expensed over time. Think of really those two components as being the main drivers that get us to the $60 million run rate. Project expense probably accounts for $5 million of that $60 million run rate on a quarterly basis.
Eric, I'll add a little to Axel's answer there, which is, how do I think about expenses? And it's probably good you hear from me as well. Axel covered all the facts. $60 million a quarter, $240 million a year, if look at where we focus on being a greater growth company, faster growth company and driving this ROA model transformation, it is a huge amount of opportunity for us to drive investment returns, private asset sourcing, capital, and building a robust foundation so that others come to us and say, what you've done for AEL, do for us, like my answer to Pablo earlier. I'm fine at $60 million a quarter for one very simple reason. It translates to 42 basis points of AUS. Page 11 of the supplement is my new favorite page. It's got both the ROA balances and it's got the spread earning assets. We're at $57 billion, right? $240 million a year on $57 billion is 42 basis points. Frankly, that's amazing relative to others in the industry. And we price for things to be higher than that when we think of new product pricing. That number needs to stay somewhere in the 40 basis points, mid- to high 40 basis points there. So frankly, if $60 million was a little higher than $60 million, I'm fine with it, but we are going to grow NII and control $60 million a quarter. It's expense control, not reduction, because the capabilities we build will be then scalable more. That's a very long wordy answer, but hopefully that takes your context up a level.
Yes, that's helpful. Thank you. And then, Anant, you mentioned I believe that beyond 2022, you expect or hope that the majority of gross sales will be ceded to third parties. Can you just help us think about what this means for the trajectory of your spread earnings? And do you expect net sales to decline? Or do you think you have distribution capacity to materially accelerate gross sales such that you're growing key earnings but also maintaining kind of the level of net sales that go to your spread-based earnings you have today?
The migration to ROE will create what we believe to be a higher multiple earnings streams because of the fact that we don't have to come up with the capital for it, Erik. But the opportunities in there, the short answer to your question is, there's plenty of opportunity for us to regain some skin in the game. If you think of these reinsurance deals, we'll probably have to keep 25% on our books and 75% gets reinsured to have skin in the game to maximize the ROA fees we can generate. And that way, balances should be stable, but dollars of earnings, whether they shift in a different direction, we'll have to see. We think the opportunity for us to keep the balance sheet size where it is and then drive growth through ROA is the way to think about it.
Got it. Basically, maintaining the spread based earnings once you get to kind of the target spread and then the growth should come predominantly from the ROA side of the business.
Correct. And the spread earnings are not just from the notional of AUM there, but the rate of return as we get north of 4% of the ramping up of private assets from 15% to up to 40% of the portfolio.
Thank you. Our next question comes from John Barnidge with Piper Sandler. Your may proceed with your question.
With the effort on the reinsurance side, can you maybe please talk about how we should be thinking about the tax rate near term and as you look out as AEL goes to 3.0?
We're not expecting any tax efficiencies from the reinsurance effort for us because we are a U.S. taxpayer. Our Bermuda company is a 953(d) election company, meaning it will pay U.S. taxes. And I should probably sop answering this question because they are more qualified people than me in the room to ask any follow-on you have.
Okay. And then you're at 15% allocation on private assets. Target is 30% to 40%. How quickly can you get there? Maybe talk about that a little bit? Thank you.
John, this is Jim Hamalainen. We expect that over a period of two to three years, probably closer to three years, we can get into that targeted range.
Thank you. Our next question comes from Ryan Krueger with KBW. Your may proceed with your question.
On the spread, I think in your DAC model, you'd assume 240 basis points once the excess liquidity was deployed. Is that still what you'd expect in 2022?
Yes. The path of interest margin that's embedded in the DAC model, it's very consistent with where we've actually realized spreads. So as noted, in the first quarter we have still been putting cash to work, so there's still a bit of trajectory going up there. And by the end of the first quarter, we'll be pretty much at target in terms of that cash allocation which would result in that spread reaching its near-term level.
Got it. And then on the $126 million of DAC DSI amortization that you guided to for the first quarter, is that -- would there be any ramp-up after that from fully redeploying the excess liquidity? Or does that largely already reflect that?
That number actually already reflects the ramping up in allocation -- the ramping up and fully redeploying cash and putting it to work.
Thank you. Our next question comes from Mark Hughes with Truist. Your may proceed with your question.
On the distribution front, I think you had talked previously about $6 billion in new sales being kind of your maximum. You wouldn't necessarily want to go beyond that for capital reasons. Is that still a good statement? And do you think $6 billion is a reasonable target for this coming year?
Hi, Mark, it's Anant here. Yes, $6 billion was at the upper end of the range we set for last year, which was $5 billion to $6 billion was the range for last year. I think what we're very much focused on is FIA sales. FIA sales were $3.5 billion, and we'll look to grow that low to mid-single digits from $3.5 billion and control SPDA sales. So don't think of us targeting $6 billion this year. It's not for capital reasons, it's for ROA conversion reasons. You can't convert a three-year SPDA into an ROA business. You can convert a 5, maybe a 7, 10 or longer FIA into ROA, and that's our driver.
What is your sense, just a very general question, a rising interest rate environment, what does that do for demand for those FIAs? How does your independent agent channel respond to rising interest rates? Should that be much of a tailwind?
It should be a tailwind for multiple reasons. It allows to make the product relatively more competitive without relying on ramping into private assets because core fixed income delivers returns there. Also, what a client wants is certainty of outcomes. We're a protected accumulation company, then that converts it into certain outcomes, which happened to be retirement income as one example, it can be many other things over time. Therefore, rising rates is a meaningful tailwind for us to grow the space. And we want to grow the market for this product. It meets financial planning needs. You can't be the financial dignity company if you don't have people achieve dignity through your solutions, and that's where I think it starts.
Thank you. [Operator Instructions] Our next question comes from Pablo Singzon with JPMorgan. Your may proceed with your question.
A question for Anant. I guess if we sort of simplify what's happening with AEL, what you're doing between the investment portfolio and your push into third-party capital. Do you think achieving your end state on the investment side, so call it 30% to 40% in private and the higher earnings associated with that, will that be enough to support your call it the 450 annual buyback commitment? Or are incremental earnings from other initiatives necessary to sort of support that number on an ongoing basis?
Yes. The investment income generated by achieving the full allocation to private assets of 30% to 40% is meaningful, Pablo, we've got investment yields going up from around 4% this year to meaningfully up there with the allocation, so that's additional earnings that can be redeployed, especially when you don't need earnings for growth with the conversion to ROA. I think those are the drivers that will make it happen. Three drivers to drive capital return, high investment income by growing privates, ROE conversion, meaning you don't need capital for growth of new business. And then obviously, the ROA fee earnings as well are capital-light. You don't have any capital backing them. Those three are your drivers for capital return.
Got it. And maybe a couple of short ones for Axel. On the Bermuda Reinsurer, was there any capital benefit associated with that like what's happened with I guess the Vermont cap with labor? And sort of what are your thoughts on that capital? Is it as fungible as the capital that is released from the LIBR refinancing?
Yes. Yes, so the block of business that's reinsured, we talked about in the past how Bermuda has this principles-based regime, which is particularly good for well ALM-matched books of business where you get -- you specifically get that benefit embedded in the capital regime. And so certainly, that was a big component of ceding that piece of business there, moving from the high C3 charge in the U.S. to the more principles-based version in Bermuda. And then, of course, as we migrated the assets, you got the drop in C1. So those two things together resulted in a decrease in required capital. And the RBC impact of that on the U.S. entity we estimate to be about 40 to 42 points of impact, which you can translate to a dollar equivalent. Of course, it's -- the impact is on required capital, some of it is unavailable. But if you pretend that it was all available capital impact, it would translate to $460 million of impact. So that creates capital within the U.S. company, which we can then of course use and go to work. Part of that consumption of capital is the ramp-up in private assets. And then over time, of course, the ability to take dividends out of the operating company subject to all of the usual rules around that.
Yes. And then just last one for me, Axel. Just any thoughts on where LDTI will shake out with respect to the market-to-market of your LIBR reserves?
On LDTI, we're obviously doing all of the work, and we expect to be talking about that a lot more in the second half of this year.
Thank you. Our next question comes from Ryan Krueger with KBW. Your may proceed with your question.
I guess there's clearly a lot of moving parts right now, so maybe trying to boil it down from a higher level in thinking about the 11% to 14% ROE target, can you give any perspective on where you potentially start out within that target in 2022 and how you think it could progress over the next few years?
While there are a lot of moving parts, you're right. I think we've stabilized into three real things. We have to scale private assets as we are doing and will do to generate $3 billion to $4 billion this year, and that will drive NII up say 4% or higher. We will do more reinsurance transactions. I don't know if we'll close another one this year, but we have discussions and sizing in mind. But growing the Brookfield transaction, for example, we'll grow in-force going there. So at least 1/3 if not more of FIA sales this year will go there. And therefore, capital consumption will be low and allowing us to be aggressive in our capital return plan, so that will help again. And then finally, the new business origination is very disciplined and market expansion is within managing expenses at this $60 million a quarter level. Expense control that is really what will drive us to deliver EPS and book value growth. And then you do the division of those two numbers, you end up at like the lower end of that range this year. And as we execute those, you go to the higher end of that range and maybe even exceed that range over time.
Thank you. And I'm not showing any further questions at this time. I would now like to turn the call back over to Julie Heidemann for any further remarks.
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