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Text: Our actual results could significantly differ due to many risks, including those -- 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.
Before we speak about second quarter results, I want to provide you with three strategy execution updates.
First, we reached agreement with Brookfield on a reinsurance contract that covers both, a portion of our in force, and new business flow.
We have filed the agreement with our regulator for approval.
We look forward to receiving regulatory approval and closing on the reinsurance treaty.
Shortly after, we would expect the second anticipated equity investment from Brookfield to be completed.
Second, we have completed our share repurchase of 9.1 million shares since starting our buyback in the fourth quarter of last year.
This fully offset the impact of shares issued to Brookfield.
The total buyback included repurchase of 3 million shares in the second quarter for $95.1 million.
Additionally, for the first time in our company's history, in the second quarter, we started leveraging our asset management partnerships to invest in single-family rental homes and middle market loans, consistent with ramping toward the AEL 2.0 asset allocation strategy.
During the quarter, we invested in 933 single family rental homes.
AEL, will indirectly be the landlord to residential renters with partners who manage the property through acquisition, renovation, leasing, and sale in focus metropolitan areas, where the trends of wage growth and rental growth dynamics are robust.
During the quarter, we allocated $104 million to middle market loans.
We expect middle market credit to be an important piece of the AEL 2.0 investment strategy.
Finally, we continued the revitalization of our go-to-market strategy pillar, which has historically been an industry-leading at scale, annuity funding origination platform.
This platform slowed down in recent years.
And one of the focus areas in my first year as CEO, was to revise sales by refreshing our product mix and how we go to market.
Go to market has been trending upwards since the fourth quarter of last year.
Preliminary estimates indicate that the second quarter of 2021 will mark the third straight quarter in which the company increased its fixed index annuity or FIA market share.
At American Equity Life, FIA sales were driven by the new competitive indices we introduced to AssetShield back in February.
At Eagle Life, the increase in FIA sales was driven by new relationships, our new income product, and an increase in our employee, wholesaler force.
In addition, on July 21, we announced to our independent agent distribution, the introduction of our new product EstateShield.
EstateShield is an expansion of our income offerings in the non-guaranteed income space.
This sub-segment of the market is a $4 billion per year product space historically dominated by two of our competitors.
EstateShield has received strong support from key distribution partners and we look forward to growing sales in the coming quarters.
We are committed to continue to introduce new products as we move through the AEL 2.0 transformation, which will help us compete effectively and grow our share of the annuity market.
Moving onto business results for the second quarter, total sales of $1.2 billion were down sequentially as expected versus the all-time record we set of $2.4 billion in the first quarter of this year.
As we discussed on the last call, we are focused on our fixed index annuity products, For the second quarter, FIA sales increased 33% sequentially to $887 million.
As I said earlier, we believe this will be the third quarter in a row in which FIA market share increased.
Clearly, the changes that we've made in our go-to-market franchise over the last year are resonating with distribution.
At American Equity Life, fixed index annuity sales increased 36% to $703 million from $517 million sequentially, as the refreshed AssetShield series continued to see increased momentum, led by a sequential 206% increase in AssetShield deposits.
In the quarter, the three proprietary indices we introduced to AssetShield, as part of our February refresh, the Credit Suisse Tech Edge Index, the Societe Generale Global Sentiment Index, and the Bank of America Destinations Index, accounted for 77% of second quarter AssetShield deposits.
FIA sales at Eagle Life of $185 million represented a 24% increase versus the first quarter of 2021, and a 155% increase compared to the year ago quarter.
Our new Eagle Select, income focus, guaranteed retirement income product accounted for roughly half of the sequential quarterly increase.
The Eagle Life team is increasing our presence within distribution partners by updating our FIA product shelf and increasing our sales force headcount, while raising the quality of talent.
In addition, we are leveraging relationships with advisors, and our distribution partners, centers of influence, uncovered through multi-year fixed rate annuities to migrate toward fixed index annuity.
As we indicated on past calls, our plan has been to reengage with distribution with a simpler multi-year fixed rate annuity product during COVID-19, and then pivot to driving growth through a revamped fixed index annuity product portfolio.
We are beginning to see our plan bear results.
As the financial planning needs of Americans evolve, American Equity is focused on providing our clients the dignity of a paycheck for life.
I believe our commitment to this core mission statement will become recognized and appreciated in the market over time.
This will help grow AEL in both our channels and open up other market access opportunities for us in the future.
At this time, I would also like to take a moment and share with you the conclusions of a corporate governance project undertaken by our Board of Directors.
Earlier this year, our Board, retained a nationally recognized expertise to review its structure and operations and to advise it on governance practices.
The Board has completed its review and is implementing changes to refresh our corporate governance, in line with best practices and to advance our strategic evolution.
The Board has set a new target size of seven to nine directors.
Plus, the CEO has set a new Director retirement age at 75 years and has modified the membership and structure of its committees.
Importantly, on this front, our audit committee well exercise increased risk management oversight.
The Nominating and Corporate Governance Committee will have an expanded role in Director compensation, selection and skills training.
The Compensation Committee we'll have a deeper role in executive talent development and succession planning.
We believe these changes will make our Board even more effective in driving stakeholder value realization and in playing its essential role in the successful transformation of the company.
Capital markets showed strong performance and the investment portfolio performed as expected in the quarter.
The overall credit quality remained strong with an overall rating of single A minus for long-term investments.
The net unrealized gain position improved by $1.2 billion in the quarter ending at $4.8 billion.
The strong bid for assets, combined with low treasury yields, continues to make the investment environment challenging, but we are finding good opportunities.
We use the strong bid to continue to reduce exposure to higher risk positions in structured assets, in select sub sectors that have the potential for future deterioration.
There were minimal credit losses in the quarter and the performance of our commercial loan portfolio remained strong with no new delinquencies or forbearances granted.
From a liquidity standpoint, we continue to hold cash in excess of target levels and what's needed to fund the reinsurance transactions.
At June 30, we held $10 billion of cash and equivalents in the insurance company portfolios.
As Anant will discuss in a moment, the average level of cash and equivalents increased in the second quarter.
The current point in time yield on the portfolio, including excess cash, is still approximately 3.3%, so the pressure on investment spread will continue into the third quarter.
After completion of reinsurance transactions and the redeployment of remaining cash in excess of our target, we estimate the yield on our investment portfolio would still have been approximately 4%.
With regards to redeployment, we expect to have substantially redeployed excess cash that's not expected to be used in the reinsurance transactions by year-end.
We are taking solid steps in the execution of our strategy to add $1 billion to $2 billion in privately sourced assets this year, growing to a pace of 5% or greater, of the portfolio in each subsequent year, to achieve an allocation of 30% or greater in privately sourced assets.
Year-to-date we have allocated approximately $800 million to privately sourced assets, including residential mortgage loans, single-family rental homes, commercial mortgage and agriculture loans, and middle market loans.
Traditional fixed income securities, continue to be part of our strategy to deploy excess cash.
Our focus in the traditional strategy has been strong investment grade credits in the public corporate and municipal sectors.
For the second quarter of 2021, the expected return on long-term investments acquired net of third party investment management fees, was approximately 4.15% compared to 3.74% in the first quarter.
We purchased $1.1 billion of long-term fixed income securities at a rate of 3.3% and $569 million of privately sourced assets at an expected return of 5.67%.
The privately sourced assets include the ongoing origination of commercial mortgage and agricultural loans, as well as residential mortgage loans.
Consistent with our long-term plans, we added privately sourced assets in new asset classes for the company, which consisted of residential real estate investments and investment in a joint venture that is sourcing middle market loans at attractive investment yields.
Now, turning to financial results.
For the second quarter of 2021, we reported non-GAAP operating income of $93.8 million or $0.98 per diluted common share, compared to $93.1 million or $1.01 per share for the second quarter of 2020.
Results were negatively affected by the transitionary effects I mentioned, both today, as well in the past, in particular the effect of cash in the portfolio in excess of target range and the level of operating expenses.
However, strong index credits in the quarter, boosted operating earnings through both a lower than expected increase in reserves for guaranteed lifetime income benefits, and lower than modeled amortization of deferred acquisition in deferred sales inducement costs.
Average yield or invested assets was 3.51% in the second quarter of 2021 compared to 3.58% for this year's first quarter.
The decrease was primarily attributable to a seven basis point reduction from interest foregone due to an increase in the average amount of cash held during the quarter.
Cash and equivalents in the investment portfolio average $10 billion over the second quarter, up from $8.6 billion for this year's first quarter.
Partnership income and other investments accounted for at fair value contributed an additional one basis points to yield, compared to the prior quarter, and eight basis points on an absolute basis.
The aggregate cost of money for annuity liabilities was 156 basis points, down two basis points from the first quarter of this year.
The cost of money in the second quarter benefited from full basis points of hedging gains compared to two basis points of gains in the first quarter.
Investment spread in the second quarter was 195 basis points, down five basis points from the first quarter.
Excluding non-trendable items, adjusted spread in the quarter was 181 basis points compared to 187 basis points for the first quarter.
In line with yield, we would anticipate our investment spread to rise back to our expected levels once the reinsurance transactions are completed and the excess cash is redeployed.
The cost of options was up slightly to 147 basis points from 145 basis points in the first quarter of 2020, primarily reflecting an increase in the cost of PK options hedging our monthly point to point strategies due to the decrease in volatility over the quarter.
Monthly point to point remains our largest hedge strategy at just over 25% of notional.
All else equal, we expect to see the cost of money remained relatively stable over the remainder of the year.
Should the yields available to us decrease, or the cost of money rise, we have the flexibility to reduce our rates, if necessary, and could decrease our cost of money by roughly 58 basis points, if we reduce current rates to guaranteed minimums.
This is up slightly from 57 basis points we cited on our first quarter call.
The liability for Lifetime Income Benefit Riders, increased $34 million this quarter, after net positive experience, an adjustment of $29 million relative to our modeled expectations.
The better than expected results primarily reflected the benefit from historically high equity index credits in the quarter, as well as positive renewal premium experience.
Deferred acquisition cost and deferred sales inducement amortization totaled $101 million, $31 million less than modeled expectations due to lower than model investment spread and benefit from high level of equity index credits.
Other operating costs and expenses increased to $65 million from $56 million in the first quarter.
Operating costs in the second quarter included $5 million of expenses associated with talent transition.
Post refinancing our existing AG33 redundant reserve financing facility later this year, we still expect operating expenses to settle in the high 40s million dollars per quarter area.
As we become a new AEL, we will invest in upgrading our infrastructure and our intent is to quantify this investment spend for you in the future.
Total debt -- total capitalization, excluding accumulated other comprehensive income at the quarter-end was 11.9% compared to 12.2% at year-end and 14.7% in last year's comparable quarter.
At June 30, cash and equivalents at the holding company were in excess of our target by $330 million.
Finally, we have $236 million of share repurchase authorization remaining under the current plan approved by the Board of Directors in October 2020.
Once the Brookfield Form-A is approved, we expect to actively repurchase more shares to both offset any dilution from future acquisitions to Brookfield, and to start on our plan of regularly returning capital to shareholders.

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q2 non-gaap operating earnings per share $0.98.
q2 2021 annuity sales of $1.2 billion driven by strong growth in fixed index annuity (fia) sales.

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