American Equity Investment Life Ho (AEL) Q2 2021 Earnings Call Transcript

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American Equity Investment Life Ho (AEL 0.72%)
Q2 2021 Earnings Call
Aug 6, 2021, 10:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Welcome to the American Equity Investment Life Holding Company's Second Quarter 2021 Conference Call. At this time, for opening remarks and introductions, I would like to turn the call over to Julie LaFollette, Coordinator of Investor Relations.

Julie LaFollette -- Coordinator of Investor Relations

Good morning and welcome to American Equity Investment Life Holding Company's conference call to discuss second quarter 2021 earnings. Our earnings release and financial supplement can be found on our website at www.american-equity.com. Non-GAAP financial measures discussed on today's call and reconciliations of non-GAAP financial measures to the most comparable GAAP measures can be found in those documents or elsewhere on our Investor Relations portion of our website. Presenting on today's call are Anant Bhalla, Chief Executive Officer and Interim Chief Financial Officer; and Jim Hamalainen, Chief Investment Officer.

Some of our comments will contain forward-looking statements indicated by terms such as anticipate, assuming, and believe, continue to, estimate, expect, forward, future, intend, likely, look to, may, need, over time, plan, potential, project, should, strategy, target, trends, will, and would. 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. Thank you, Julie. Good morning and thank you all for your interest in American Equity. 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. Now, I'll turn the call over to Jim Hamalainen, our Chief Investment Officer, before I come back to cover financial results.

Jim Hamalainen -- Chief Investment Officer of Insurance

Thank you. Anant. 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.

With that, I'll turn it back to Anant.

Anant Bhalla -- Chief Executive Officer & Interim Chief Financial Officer

Thanks, Jim. 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.

Now, I'll turn the call over to the operator to begin Q&A.

Questions and Answers:

Operator

[Operator Instructions] And your first question comes from the line of Wilma Burdis from Credit Suisse.

Wilma Burdis -- Credit Suisse -- Analyst

Could you just walk us through the mechanics of hitting the 2021 share repurchase target of 250 million to 300 million, ex the BAM dilution? We were definitely happy to see that you guys finally offset the first deal, but just trying to think through how the second deal will play out. Sure. Hi. Roman, nice to hear your voice. Hey, nice to hear from you.

Anant Bhalla -- Chief Executive Officer & Interim Chief Financial Officer

And as I noted earlier, we have completed our share repurchase of the 9.1 million, right, which fully offsets the first tranche. Brookfield is awaiting the Form-A approval from insurance regulators, it's really their filing. And therefore, we are currently paused in share repurchase just to avoid their current holdings from exceeding 9.9%. After that From-A approval is received, we expect to retire all those shares through share repurchases or other means, and then start a regular capital return. So, it's really a function of timing, our intent has not changed on the 250 million post offsetting that dilution. And we have a cash at the holding company, as you can see, to put back to work.

Wilma Burdis -- Credit Suisse -- Analyst

Got it. I guess my question, just kind of on timing, just because it seems like -- just thinking about how long it's going to take to kind of process the Form-A, and then just what a good quarterly run rate buyback is to kind of achieve that goal?

Anant Bhalla -- Chief Executive Officer & Interim Chief Financial Officer

Yes, I rather not speculate on mechanics of capital return, but needless to say, we are hopeful that Form-A is in the foreseeable future, and then it's really a function of execution. Your point is a spot-on question, which is that, if you had out of the market in the third quarter, can you get it all done in the fourth quarter, and that's really what we're thinking about.

Wilma Burdis -- Credit Suisse -- Analyst

Okay. Does it seem feasible right now to get it done in the fourth quarter?

Anant Bhalla -- Chief Executive Officer & Interim Chief Financial Officer

There are means to do it, but I don't want to commit to it. But I would say my intent has not changed, our intent has not changed, but there are better means to get it done in the fourth quarter if needed. Yes.

Wilma Burdis -- Credit Suisse -- Analyst

Got it. I guess the other question, if I can, with another one, just the 65 million of expenses was definitely a bit high. I know you called out kind of the 5 million on talent transition. Could you maybe specify the other kind of notables in there and just kind of talk about the timing to getting back to the high 40s?

Anant Bhalla -- Chief Executive Officer & Interim Chief Financial Officer

Sure. So, if you back out what you just mentioned, you're right. So, the path back to the high 40s is really around our refinancing of our AG33 redundant reserve financing. We expect to complete that this year and that will get us back to the high 40s. The other parts of it, it doesn't get you fully back to the high 40s, but the other parts a onesie, twosies going through, like, as we are standing up new operations. We acquired a new team. We're building out things in the investment structuring area. So, we really see those things getting done and quantifying the investment spend that's there, but that's what gets us back there.

Wilma Burdis -- Credit Suisse -- Analyst

Have you guys quantified the redundant reserve financing costs?

Anant Bhalla -- Chief Executive Officer & Interim Chief Financial Officer

We have, but we are in a competitive negotiation. So, I'd rather not show my hand of the new for you.

Wilma Burdis -- Credit Suisse -- Analyst

Okay, got it.

Anant Bhalla -- Chief Executive Officer & Interim Chief Financial Officer

It would be fair to say if you took the last quarter's expense number, and you took out the financing cost, we would clearly be in the range you just asked about which is the high 40s.

Wilma Burdis -- Credit Suisse -- Analyst

Okay, got it.

Operator

And your next question comes from the line of Erik Bass from Autonomous Research.

Erik Bass -- Autonomous Research -- Analyst

Hi, thank you. Higher index credits are nice tailwind this quarter and they seem likely to continue just given where markets are. So, just hoping if you could talk about what this could mean for your go-forward earnings and capital?

Anant Bhalla -- Chief Executive Officer & Interim Chief Financial Officer

I can start and I'd love to ask Stephen to add in. He has been looking at this for a long time, Erik. By the way, good morning. The higher index credit this quarter were very strong, but the point I would highlight is that 25% of our book is these monthly point to point PK options. And those kicked in meaningfully for the first time this quarter. There was a little amount of them in April, in the last quarter, but not much till there. So, if markets are sustained at current levels, we should continue to see monthly point to point to kick in, because that's when, once the market drops, it takes 12 months really to cure yourself to start to get pay-offs. The market fell last March and April. Now, this March and April, therefore, those options start to kick off. And those were worth over $200 million of index credits for us. So, a lot of value from that index credit coming through and that should continue. Stephen, why don't you add in?

Steven Schwartz -- Head of Investor Relations

Yes. Hi, Eric. This is Steven Schwartz, Head of Investor Relations. And Anant is right, If you want to take a look at the big difference between the index credits and our account roll forward versus the first quarter of this year, it's really coming from monthly point to point and that kicking in, whereas the first quarter of last year, which was terrible for the markets as COVID developed has run off. So, that's where that is coming from. The question of what reserves or DAC [Phonetic] should look like? Yes, given current equity markets, we should continue to see a benefit; all else equal. And I want to that caveat that because, of course, all else isn't equal. The third quarter is coming up. The third quarter unlock is coming up and patterns will undoubtedly change. The level of equity index credits should be a positive for the unlock but there are obviously dozens of other assumptions that go into that. So, with that caveat, yes, you would see what you were suggesting, but the unlock is there.

Anant Bhalla -- Chief Executive Officer & Interim Chief Financial Officer

And just to give you a place to point to our, in our financial supplement on page 10 -- I'm putting on my CFO hat, Erik, you see index credits over there and you can see a bit how they were $777 million and that there is a $200 million plus of PK month to month benefit in that. So --

Steven Schwartz -- Head of Investor Relations

Got it. Thank you. And I guess, in addition to the amortization benefits you also think of, when you're building account value with the higher index credits, that all else equal should be a tailwind. And then I think for your RBC calculation, the index credits factor into that. So it's. I believe, a benefit to the RBC ratio as well for higher?

Hi, it's Steven again. Yes. On both, first the question with regards to lever, yes, our policyholder funds under management, because of the strong equity index credits are better than modeled, that is a positive going forward for the increase in lever reserve as well. Again, with the caveat of the unlocking and potential actuarial assumption revisions in the third quarter. Yes, index credits as well, or as we've talked about in the past, do affect statutory results and strong index credits to benefit statutory income.

Erik Bass -- Autonomous Research -- Analyst

Thank you. And then --

Operator

And your next question comes from the line of Pablo Singzon from JP Morgan.

Pablo Singzon -- JP Morgan -- Analyst

Hi, good morning. Can you talk about how fast you can revert to a portfolio of 4% from where you are now, I guess after the reinsurance deal close? It seems like reinsurance will use up a decent amount of excess cash, but as you had mentioned, Anant, you have to reposition some of the cash into new investments, which presumably might take some time. So, just any color you can provide there. Thanks.

Jim Hamalainen -- Chief Investment Officer of Insurance

Sure, Pablo. This is Jim. Thanks for the question. I moved into the CIO role earlier this year. And one of the first things Anant asked me to do is to take a fresh look at our investment process, particularly focused around cleaner process that's resilient through the market cycles. Particularly in downcycles in terms of capital efficiency. We're working through that process. As you know, we did a lot of risk derisking late last year, some more in the first part of this year. As we work through the process, we expect to put substantially all of our excess cash to work over the next six months.

Pablo Singzon -- JP Morgan -- Analyst

Got it. And then, second question for me, different topic. So, can you provide a bit more detail on the AG3 for your sort of financing. Is the objective to get a lower rate or to reduce the magnitude of resource [Phonetic] being financed, and does the internal reinsure you're setting up for your AG33 strategy? Thanks.

Anant Bhalla -- Chief Executive Officer & Interim Chief Financial Officer

Hey, Pablo. It's a great question. It's not to get more financing but to optimize the rate to get to a more market rate, then we have. The markets move in the favor of insurers and we want to get that rate. But I think it's a good opportunity for me to sort of take this time and talk to you about, really, how do we think about the reinsurance company. So there is also advantage to capital efficiency with both the repurchase of private invested assets and benefiting from tighter ALM with the captive reinsurer. And so that will provide us the flexibility moving forward, in addition to the better rate.

Pablo Singzon -- JP Morgan -- Analyst

Got it. Thank you.

Operator

[Operator Instructions] And your next question comes from the line of John Barnidge from Piper Sandler.

John Barnidge -- Piper Sandler -- Analyst

Thank you very much. Most of my questions have been answered, but I was curious, is the drop gate for 3Q '21 or 4Q 21, where [Phonetic] the reinsurance transactions don't close that. It would seem certain, maybe elevated expenses leak into '22?

Anant Bhalla -- Chief Executive Officer & Interim Chief Financial Officer

Hi, John. Well, we would expect the full benefit from the AG33 reinsurance transaction to really come in '22 because we're later in the year. I sort of quantified for Wilma in her question on where's that on a quarterly run rate basis. I don't really think so. This is a function of -- let me sort of layout our prioritization, right? These transactions take time to do. Our privatization clearly has been to complete the negotiation and contracting on Brookfield which we -- we finished that in June with the regulator. We need to get the Brookfield Form-A done and the Form-D done, which is the reinsurance transaction. That is paramount. And then, the reinsurance financing. Those to were our priority transactions. And then we go with Ray REE [Phonetic] our captive reinsurer up to the regulator. So I don't see any real risk subject to our regulatory approval, which I'm not going to comment on the regulators, but that gets done this quarter or early next quarter.

John Barnidge -- Piper Sandler -- Analyst

Okay, thank you. Best of luck in the quarter.

Anant Bhalla -- Chief Executive Officer & Interim Chief Financial Officer

Thanks.

Operator

[Operator Instructions] And your next question comes from the line of Erik Bass.

Erik Bass -- Autonomous Research -- Analyst

Hi, thank you for taking the follow-up. You just addressed part of it, guess with the timing of the Brookfield return transactions. And then, how are you thinking about the Varde deal and the potential timing there?

Anant Bhalla -- Chief Executive Officer & Interim Chief Financial Officer

Hi, Erik. I'm glad you got back in the queue. I saw your question got interrupted. Thanks for coming back I think you've got the sequencing right. Brookfield, all aspects of it, Form-A and Form-D, that is really a cornerstone strategic partnership we want to consummate. We are very happy with the way it's come together. I really wanted to share with you all the economics of it and how we think about it on a cash economics basis but I need to get the regulatory transaction closed. Then we've got the redundant reserve financing and Ray REE. And in terms of Varde, to where I would put it at, we are yet to finalize the final terms of that transaction of Varde and Agam and expect to update you on that post the completion of the first three. But it does not get in the way of us getting fully invested over the next six months, like Jim mentioned, after closing both Brookfield and Ray REE, because our reinvestment plans are not contingent on that and we will always be vigilant on shareholder value realization. What is important for shareholder value realization is Brookfield, AG33 refinancing, Ray REE. Varde is literally, it's important, but it's -- the first three are paramount.

Erik Bass -- Autonomous Research -- Analyst

Got it. But I guess to be conservative at this point, we should probably not assume that kind of the 5 billion reinsurance agreement with them occurs in the second half of the year and then that capital becomes available?

Anant Bhalla -- Chief Executive Officer & Interim Chief Financial Officer

That's a fair assumption to make. That is a very fair assumption to make. But I would say that Ray REE frees up capital for us as well. And you may ask why? So, the reason for that is because with Ray REE, we get into more ALM friendly jurisdiction. So, our C3 capital on our non-MVA business, which is a high risk C3 capital charge, would be lower in a jurisdiction where you got the benefit for ALM. So, from a capital release point of view, we have many alternates in place than Varde, and that was a real benefit of Varde. I'm focused with this leadership team to creating sustainable recurring revenue streams, so that we can shift toward ROE. Varde-Agam were not core to that. They release capital. But it didn't create a revenue stream like Brookfield did, it doesn't create a revenue stream like alternative assets do, and that's what we want to do. Hopefully, that gives you the right color.

Erik Bass -- Autonomous Research -- Analyst

Yes, that's very helpful. Thank you. And then, just lastly, and I don't know if you can answer this, but you now have the final agreement for the Brookfield on the transaction, are there any material changes in this versus the initial agreement in principle that we've seen?

Anant Bhalla -- Chief Executive Officer & Interim Chief Financial Officer

What I would tell you, we were very pleasantly surprised with the final terms and you will really like them when we share them with you, especially as we bring in new business flow in the totality of the agreement. If they're a great partner, we look forward to doing many things with them over the years.

Erik Bass -- Autonomous Research -- Analyst

Great, thank you.

Operator

Your next question comes from the line of Pablo Singzon from JP Morgan.

Pablo Singzon -- JP Morgan -- Analyst

Hi, thanks for taking my follow-up. So, Brookfield has spun [Phonetic] off, Brookfield agreed to its shareholders, something it has done in the past with its other businesses. So, aside from having a public currency, and I guess, being able to raise capital directly, will this structural change have any implications for your reinsurance relationship with them?

Anant Bhalla -- Chief Executive Officer & Interim Chief Financial Officer

The short answer, Pablo, is no. Brookfield has -- The question is probably best directed at them. But I would tell you BAM REE [Phonetic] versus BAM is virtually the same thing. BAM REE shares are exchangeable into BAM at any point. So -- and what's most interesting to us with this partnership is, there is also permanent capital where their balance sheet that's invested in this. And that's very important. As we think of permanent REE, sidecar vehicles, we are looking for permanent capital. We're looking to really cut out the sponsor based model, where sponsors raise funds from LPs in funds, and then that capital goes into insurance vehicles, but it's not permanent capital, right? Our model is take long-term funding liabilities with permanent equity capital and be the asset allocator or the brains of the ALM machine, that brings those liabilities and assets together with differentiated asset allocation to the private assets that we are going into. That is a -- Brookfield is a great example of what AEL 2.0 will be through the reinsurance transaction we did with them. And we are -- [Technical Issue] Right. We are open architecture for investments, which completely differentiates us from every other sponsored based insurer.

Pablo Singzon -- JP Morgan -- Analyst

Got it. And then, Anant, from your comments it seems like the From-A approval process and the reinsurance review, those are completely separate? But I guess based on your comments, you expect to get approval for both in short order. What's the basis for that outlook? Just given that -- I guess, for me, it's a Brookfield process. And it seems like that's entirely separate from this reinsurance [Inaudible] in Iowa?

Anant Bhalla -- Chief Executive Officer & Interim Chief Financial Officer

Yes, it's a great question. We would view the two of those together Form-A and Form-D, because the Form-A makes them an affiliate. The Form D is therefore the required. So, it's sort of together. What makes us confident around it is, well, we have reached material agreement among us as parties. We've got in front of our regulator. We have positive momentum in dialogue with the regulator. I can't comment on the Form-A. It's Brookfield's process, but they are well aware of how it's playing out. We're really waiting for a hearing date. Once we have a hearing date, we could be more definitive if it's late 3Q or early 4Q. But all signs big signal to around that late 3Q or early 4Q. It's just a question getting a hearing done and hopefully getting approval on it.

Pablo Singzon -- JP Morgan -- Analyst

Got it.

Anant Bhalla -- Chief Executive Officer & Interim Chief Financial Officer

I won't judge [Technical issue] outcome, but that's the way I would guide you.

Pablo Singzon -- JP Morgan -- Analyst

Understood. And then last one for me. Some other companies have given the expected impact of Q1 changes. I was wondering if you could provide similar information for AEL. Thank you.

Jim Hamalainen -- Chief Investment Officer of Insurance

Sure, this is Jim. We have taken a look at that and our early estimates would be around a 20 point impact, RBC for that.

Pablo Singzon -- JP Morgan -- Analyst

Thank you.

Operator

At this time there are no further questions. I would now like to turn the call back over to Julie LaFollette for closing remarks.

Julie LaFollette -- Coordinator of Investor Relations

Thank you for your interest in American Equity and for participating in today's call. Should you have any follow-up questions, please feel free to contact us.

Operator

[Operator Closing Remarks]

Duration: 42 minutes

Call participants:

Julie LaFollette -- Coordinator of Investor Relations

Jim Hamalainen -- Chief Investment Officer of Insurance

Anant Bhalla -- Chief Executive Officer & Interim Chief Financial Officer

Steven Schwartz -- Head of Investor Relations

Wilma Burdis -- Credit Suisse -- Analyst

Erik Bass -- Autonomous Research -- Analyst

Pablo Singzon -- JP Morgan -- Analyst

John Barnidge -- Piper Sandler -- Analyst

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