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American Equity Investment Life Ho (NYSE:AEL)
Q3 2021 Earnings Call
Nov 9, 2021, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Welcome to American Equity Investment Life Holding Company's Third 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 third 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; Axel Andre, Chief Financial Officer; and Jim Hamalainen, Chief Investment Officer. Some of our comments will contain forward-looking statements within -- indicated by terms such as anticipate, assuming, believe, continue, estimate, expect, forward, future, intend, likely, look to, may, need, over time, plan, potential, project, should, signal, strategy, target, then, to be, toward, trends, 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.

Anant Bhalla -- Chief Executive Officer & President

Thank you, Julie. Good morning, and thank you all for your interest in American Equity. Before we speak about third-quarter results, I want to share with you about the progress made in each element of our AEL 2.0 strategy that was first unveiled around this time, last year. We outlined the building blocks in order to execute the strategy, improve returns, and migrate to the capital-efficient business model we envisioned. We introduced the virtuous flywheel of the due [Phonetic] AEL business model going forward. The virtuous flywheel starts with an industry-leading, at-scale annuity origination platform. We delivered a complete refresh of our general account product suite, regained relevance and growth in our IMO distribution channel, and built additional distribution with Eagle Life while adding talent to improve productivity and product economics.

Our fundraising abilities through our 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. Over the course of this year, we have established our investment management pillar capabilities necessary to be fully invested in core fixed-income assets managed by BlackRock and Corning, and private assets managed by American Equity or its strategically aligned investment managers. We now have six sleeves [Phonetics] to seven sleeves private asset sectors in which we have conviction, specifically commercial real estate, residential real estate, including mortgages, and single-family rental homes as a landlord. Infrastructure debt and infrastructure equity, middle-market loans to private companies, and lending to recurring revenue, technology or software with an acronym called STARR, with two Rs, sector companies, all of which would allow AEL to deploy an additional couple of billion dollars each year in private assets, demonstrably moving us toward a goal of 30% to 40% in private assets. We now have access to the necessary investment capabilities and scaling to target allocation will allow AEL shareholders to realize the full potential of differentiated asset management with a potentially lower-risk profiles than other alternate business models.

Finally, we've got the capital structuring and reinsurance capabilities to then attract third-party risk-bearing capital to this business, either for accessing AEL's at-scale liability origination or for access to both our differentiated asset allocations and our attractive cost of funding liabilities through reinsurance. The former is visible with our first such arrangement being the Brookfield Reinsurance transaction completed this quarter, with attractive fee-like revenues that will drive an evolution of AEL to a higher return on equity or ROE business through building a capital-efficient return on assets or ROA earnings model, thereby both diversifying and improving the quality of earnings. The latter will be our focus with our AEL Bermuda Reinsurance entity that we expect to go live around the end of this year with plans progressing well for it. On the Brookfield Reinsurance transaction, we executed both in-force and new business flow reinsurance, effective July 1. We believe this is a good deal for both parties. For us the weighted average fee of the first $5 billion seeded [Phonetic] to Brookfield, including $4 billion of in-force that was seeded effective July 1 was 97 basis points better than the 90 basis points originally described last October. The forward flow reinsurance fees at 170 basis points for six years to seven years is a meaningfully positive signal on the quality of our liability origination and the strength of our franchise.

In summary, late last year, we outlined the building blocks for AEL 2.0, and in 2021, we have executed all proof points for the fundamental building blocks. Going forward, we expect to reap the financial benefits from scaling, retained, spread earning assets in private assets' investments, as well as through reinsuring liabilities into fee-like ROE earnings from future reinsurance transactions or asset management allocation in both public and private assets. The Board and I are proud of the pace of execution. In some cases, like Investment Management, we have accelerated execution from 2022 into 2021 to be able to exit 2021 with all the fundamental capabilities in place to restock our capital return. We have $236 million in share repurchase authorization remaining and we expect to target the return of $250 million [Phonetic] of capital to common shareholders for 2021 starting immediately with our next regularly scheduled dividend after Board approval, later this quarter, and then, share repurchases after approval of Brookfield for May to increase its ownership in AEL from 9.9% to as high as 19.9%. The Brookfield Form-A regulatory hearing in Iowa is now scheduled for November 30. Once approval is granted to Brookfield, we intend to start repurchasing shares in the open market.

In terms of other capital initiatives, we expect the refinancing of redundant statutory reserves on our lifetime income benefit riders with an explicit fee to be completed this quarter with a transaction closing retroactive to October 1. With the closing of the refinancing, we will realize the capital savings, including but not only limited to, the capital savings we intended to achieve with a potential reinsurance of $5 billion of in-force only block of business to Varde Agam [Phonetic]. We are no longer pursuing the reinsurance business partnership with them, but expect to continue an ongoing dialog around asset management. Additionally, the new redundant reserve financing will save approximately $9 million pre-tax per quarter in financing costs once the transaction is closed relative to the prior facility. Third-quarter operating costs already reflected $2 million of savings from the recapture of finance reserves that were then seeded to Brookfield. Therefore, we expect the refinancing of the remaining redundant reserves currently being financed to result in an additional $7 million of quarterly savings going forward.

We have a strong excess capital position, generated by our reinsurance strategies and our business model evolution, thereby fueling the growth in both our new business sales or liability origination and further scaling our allocation into higher returning private assets, while returning capital to shareholders. We made major strides in the investment strategy pillar. I'll let Jim speak to this before touching on business results for the quarter.

Jim Hamalainen -- Executive Vice President & Chief Investment Officer, Insurance

Thanks a lot. Good morning, everybody. With the number of recent announcements, we finished the last 12 months with a revitalized and reorganized investment department and the asset management relationships we need to respond with resilience to changing markets. Our promise to you was to develop the relationships necessary to transform our investment portfolio toward a 30% to 40% allocation to privately sourced assets. We made good on this promise and have substantially completed the necessary build-out of our asset management partner relationships.

The biggest news was our announcement of the agreement to move our core investment portfolio management to BlackRock and Conning. In a time when it's become difficult to source good yields in core public investments, it is extremely important to maximize effectiveness. Even with $45 billion in core public assets, American Equity can't match both the breadth and depth of expertise of the large public fixed income asset managers. Migrating our core public fixed income portfolio to BlackRock and Conning will help us obtain better net yields in core fixed income, while allowing us to focus in areas where we can have an industry-leading expertise like private assets, derivative trading, differentiated strategic asset allocation, and asset-liability management.

BlackRock took over management of $45 billion of assets in October and has already invested over $1.8 billion of company cash into long-term securities on our behalf. With regards to privately sourced assets, we recently announced a strategic investment with Monroe Capital to scale a dedicated platform, focused on software, technology, and recurring revenue or STARR-based -- the STARR acronym, middle-market businesses. As part of this agreement, we have committed to initially invest $1 billion from our general account in such loans. This strategy will focus on companies that offer mission-critical, high return on investment, software or technology solutions, resulting in recession-resistant revenue streams and lower default rates. Along with expected to generate returns higher than investments with a similar risk-reward profile, our hope is to grow the STARR platform with third-party investors including other insurance companies through structured products based on STARR platform's loan origination.

We have also provided financing to our residential real estate partner Pretium to help support its purchase of Anchor Loans, a specialist in short-term mortgage loans in the single-family housing market. In addition, we purchased over $1 billion of mortgage loans related to this transaction that are a particularly good asset-liability match for further duration liabilities that we may issue. In addition, we have initiated a partnership in the infrastructure debt, and are exploring opportunities and infrastructure equity. All of this is an addition to our existing relationships with Pretium and Adam Street. To date, we've done $327 million dollars with Adam Street in middle-market loans. Since beginning our partnership with Pretium, we've invested $779 million in residential mortgages, and since this summer, $301 million in single-family rental homes. Including residential mortgage loans, single-family rental homes, commercial mortgage and agricultural loans, and middle-market loans, to date, we've invested approximately $2.5 billion dollars in privately sourced assets during 2021, exceeding our promise of investing $1 billion to $2 billion in privately sourced assets this year.

Privately sourced assets currently account for approximately 15% of invested assets. Looking at the state of the current -- the current state of the portfolio, the overall credit quality remained strong with an overall rating of single A-minus for long-term investments. The net unrealized gain position at quarter-end was $4.5 billion, down $327 million from the three months earlier as interest rates moved higher. There were minimal credit losses in the quarter and the performance of our commercial and agricultural mortgage loan portfolio remained strong with no new delinquencies or forbearances granted. From a liquidity standpoint, we continue to hold cash in excess of our current target level of 2% of invested assets. At September 30, we had $7.6 billion of cash and equivalents and the investment company portfolios, compared to $10 billion at June 30. The level of cash has since come down further with investments in private assets and as BlackRock has begun to redeploy cash into core publicly traded securities. Currently, we have approximately $3 billion of uncommitted cash to deploy between now and early 2022 to be fully invested.

For the quarter, new investment asset purchases totaled approximately $400 million, almost entirely in privately sourced assets. The expected return on new money investments in the quarter was approximately 4.6%, net of fees. The current point in time yield on the portfolio, was roughly in [Phonetic] investment activities through October 31, was approximately 3.7%. So some pressure on investments spread will continue into the fourth quarter. After the redeployment of remaining cash that is an excess of our target, we continue to estimate the yield on our investment portfolio will be approximately 4%.

With regards to redeployments, we expect to substantially redeploy the excess cash by year-end, and as previously indicated, reach our cash target in early 2022.

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

Anant Bhalla -- Chief Executive Officer & President

Thanks, Jim. Moving on to sales results for the third quarter, total sales of $1.3 billion were up 11% versus the second quarter of this year. For the third quarter, FIA or fixed index annuity sales increased 3%, sequentially, to $915 million. We believe this result will be generally in line with the overall market. Year-to-date, total sales of $4.9 billion positions us to end the year firmly toward the upper end of our 2021 sales goal of $5 billion to $6 billion outlined at the start of the year. This is a good indication of our ability to pivot in our business mix as and [Phonetic] when we see asset side or capital optimization opportunities. At American Equity Life, total sales through the IMO channel was $760 million. Of this, fixed index annuity sales increased 4% to $728 million from $703 million sequentially, as the refreshed AssetShield series continues with its momentum and got a nice lift from the introduction of the state sheet [Phonetic].

FIA sales at Eagle Life of $188 million represents a 2% increase versus the second quarter of 2021 and 210% increase compared to the year-ago quarter. Within FIA sales at Eagle Life, the early signs of a mix shift toward income product sales albeit off a small base is visible as income product sales were up 80% [Phonetic] over the second quarter of this year. Multiyear fixed-rate annuity sales were up 37% over the second quarter as we entered one of the largest banks in the country as part of our distribution footprint expansion and expect to shift mix to fixed index annuities in this bank in 2022. Excluding one notable item, we reported non-GAAP operating income of $136 million or $1.46 per share. As expected, results benefited from the completion of the in-force reinsurance transaction with Brookfield. In addition, we recorded historically high levels of income from partnerships and other investment account -- investments accounted for at fair value, prepayments and other bond fees, and hedge gains.

With that, I'm happy to give my short-lived role as Interim CFO to our new CFO, Axel Andre. We are very pleased that Axel joined the American Equity team. And over to him to go deeper into the quarter's numbers.

Axel Andre -- Executive Vice President & Chief Financial Officer

Thank you, Anant. Let me extend my appreciation to all of you attending this call.

For the third quarter of 2021, we reported non-GAAP operating income of $79.5 million or $0.85 per diluted common share compared to a loss of $249.8 million or $2.72 per diluted common share for the third quarter of 2020. Excluding actuarial assumption updates, which was the first notable item this year and the single notable item for this quarter, operating income for the third quarter of 2021 was $136.3 million or $1.46 per diluted common share, compared with $91.1 million or $0.98 per diluted common share in the year-ago quarter. The third quarter 2021 non-GAAP operating results were negatively affected by $56.8 million or $0.61 per diluted common share from updates to actuarial assumptions. Third-quarter 2020 non-GAAP operating results were negatively affected by $340.9 million or $3.70 [Phonetic] per diluted common share from such updates.

On a pre-tax basis, the effect of the third quarter 2021 updates before the change to earnings pattern resulting from these updates decreased amortization of deferred policy acquisition costs and deferred sales inducements by $161 million and increased the liability for future payments under Lifetime Income Benefit Riders by $233 million for a total decrease in pre-tax operating income of $72 million. The actuarial adjustments to amortization of deferred policy acquisition costs and deferred sales inducements as well as the increase in the liability for future payments under Lifetime Income Benefit Riders primarily reflected changes in our assumptions regarding future interest margins, lapsation, mortality, and Lifetime Income Benefit Rider utilization. We have updated or assumptions for aggregate spread at American Equity Life to increase from 2.25% in the fourth quarter of 2021 to 2.4% by year-end 2022, and then move modestly higher to 2.5% at the end of the eight-year reversion period, with a near term discount rate through 2023 of 155 basis points, and eventually grading to 210 basis points by the end of the eight-year reversion period.

Last year, we had several assumptions for aggregate spread to increase from 2.4% in the near term to 2.6% at the end of the eight-year reversion period, with a discount rate of 1.6%, grading fairly linearly to an ultimate discount rate of 2.1%. The effect of this change was to increase back in DSI amortization by $67 million pre-tax while increasing the liability for guaranteed lifetime income benefit payments by $77 million pre-tax as experience continues to emerge with slightly lowered lapsation, mortality, and Lifetime Income Benefit Rider utilization assumptions. The combined net effect was a decrease in DAC and DSI amortization by $234 million pre-tax while increasing the reserve for guaranteed Lifetime Income Benefit payments by $159 million pre-tax.

The quarter included $7.6 million of additional revenues from reinsurance stemming from our Brookfield Reinsurance transaction. Included in revenues is $3.7 million [Phonetic] of asset-liability management fees and $4.9 million reflecting amortization of deferred gain on a GAAP basis. These are 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 3.91% in the third quarter of 2021 compared to 3.51% in this year's second quarter. The increase was attributable to an 18 basis points benefit from lower cash relative to invested assets, a 22 basis point increase from returns on partnerships and other investments accounted for at fair value, and 2 basis point increase from prepayments and other bulk [Phonetic] fee income. Reflecting the in-force reinsurance transaction with Brookfield, cash and equivalents in the investment portfolio averaged $7 billion over the third quarter, down from $10 billion in this year's second quarter. The aggregate cost of money for annuity liabilities was 151 basis points, down from 156 basis in the second quarter of this year. The cost of money in the third quarter benefited from 8 basis points of hedging gains compared to 4 basis points of gains in the second quarter. The slight decrease in the cost [Phonetic] of money reflects the still relatively high cost of option purchases made in the second quarter of 2020 prior to renewal rate changes that became effective in late June and July of that year.

Brookfield in-force reinsurance transaction lowered the absolute cost of money for deferred annuities [Phonetic] in dollars by $12.9 million. Investment spread in the third quarter was 240 basis points, up from 195 basis points from the second quarter. Excluding prepayment income and hedging gains, adjusted spread in the third quarter was 220 basis points compared to 181 basis points for the second quarter. In line with yield, we would anticipate our investments spread excluding the high levels of prepayment income and hedge gains to rise back to expected levels once remaining excess cash is [Indecipherable]

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 reduced current rates to guaranteed minimums, unchanged from our second quarter call. Excluding the effect of assumption revisions, the liability for Guaranteed Lifetime Income Benefit payments increased $43 million this quarter after a net positive experience and adjustments of $15 million relative to our modeled expectations. The better than expected result primarily reflected the benefit from continued high-index credits in the quarter, offset in part by lower lapsation in certain policy blocks and higher than modeled deliver election on Lifetime Income Benefit Rider election in certain cohorts. The in-force reinsurance transaction with Brookfield lowered the expected accretion by $7 million while assumption revisions increased expected accretion by $2 million for a net of $5 million.

Deferred acquisition cost and deferred sales inducement amortization totaled $93 million for the quarter, $12 million less than modeled expectations due to strong index credits in the quarter, offset partly by higher than modeled interest margins. The in-force reinsurance transaction with Brookfield lowered the expected level of amortization expense by $7 million, while assumption revisions lower expected amortization by an additional $21 million.

Other operating costs and expenses decreased to $57 million from $65 million in the second quarter. Operating costs in the second quarter included $5 million of expenses associated with tenants' transition while third-quarter operating costs reflected $2 million of savings from the recapture of finance reserves that were then seeded to Brookfield. We expect the refinancing of the remaining redundant reserves to be effective as of October 1, resulting in an additional $7 million of quarterly savings going forward.

At September 30, cash and equivalents at the holding company were in excess of target by approximately $300 million. We expect to take an ordinary dividend from American Equity Life Insurance company, the operating company, this quarter, given the excess capital position in the life companies, further growing holding company cash by year-end 2021 to be able to largely support both our 2021 and 2022 capital return plans. This is a solid sign of the progress made just in the past 12 months in becoming AEL 2.0.

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

Questions and Answers:

Operator

[Operator Instructions] Your first question will come from Ryan Krueger with KBW.

Ryan Krueger -- KBW -- Analyst

Hi, good morning. Could you give any detail on how much capital you expect to be freed up from the redundant reserve refinancing transaction?

Anant Bhalla -- Chief Executive Officer & President

I'll start and then, Axel, carry in [Phonetic]. Hi, Ryan. Good morning. We expect that to be -- to free up capital -- everything we expected from the Varde reinsurance transaction plus some additional amount of capital, so north of $400 million.

Axel Andre -- Executive Vice President & Chief Financial Officer

That's correct, Anant. North of $400 million.

Ryan Krueger -- KBW -- Analyst

Okay, great. And there's really no -- there's no real cost of that, right, and you actually get savings along with the capital freed up?

Anant Bhalla -- Chief Executive Officer & President

Correct. We save run-rate expenses of $9 million a quarter, plus the capital free up of $400 million, plus from Brookfield we freed up around $230 million, so we add those up, you know, north of $600 million, $650 million of capital saved up.

Ryan Krueger -- KBW -- Analyst

Thanks. And then, on DAC and DSI amortization, it was $93 million in the quarter, and I know there is moving parts with excess liquidity, could you give us any sense of, once you fully redeploy the excess cash, what rough level of quarterly DAC and DSI amortization might be?

Axel Andre -- Executive Vice President & Chief Financial Officer

Sure. So, yes. So as -- as mentioned as we redeploy cash and become fully invested, you'd expect our yield to pick up as a result, our interest margins will pick up, and the impact of that on amortization is that the amortization rate will increase. Roughly speaking, we expect it to increase from the run rate of around $105 million back up to about $120 million.

Ryan Krueger -- KBW -- Analyst

Okay, thanks.

Operator

Your next question will come from Wilma Burdis with Credit Suisse.

Wilma Burdis -- Credit Suisse -- Analyst

Hi. Good morning. Could you talk a little bit about Eagle Life sales channel for very strong fixed annuity sales? But I guess my question is, will that translate ultimately into by FIA sales. I know not, you mentioned kind of 2022, but I noticed the FIA sales were only I think kind of 2% quarter-over-quarter, so just curious about that?

Anant Bhalla -- Chief Executive Officer & President

Hi, Wilma. Good morning. Yes, it will translate because that's how we intend to pay them [Phonetic]. And I think performance alignment is very important with pay [Phonetic], where we're, jokes apart, FIA long-duration products, that's our sweet spot, that's how we differentiate an investment allocation and then find great assets. So, if you enter a new channel, you enter a new relationship. In the first-quarter call, 6 of May, I mentioned PNC, that's the financial institution we entered -- we entered, therefore [Indecipherable] were higher or fixed-rate annuity sales were higher, but eventually, the pivot has to happen to FIA. That's how we measure success. Yeah.

Jim Hamalainen -- Executive Vice President & Chief Investment Officer, Insurance

Wilma, this is Jim Hamalainen. So one thing I'll add to that is that we have spent the last year building up the organization, the sales and distribution organization within the company. So that's been a process that has taken over the past year. And so, we expect to see some impact from that going forward, also.

Wilma Burdis -- Credit Suisse -- Analyst

And then, just one quick follow-up. Any concerns on the pricing for the [Indecipherable] since that's been a big push?

Anant Bhalla -- Chief Executive Officer & President

It's a very good question. I mean it gets bound [Phonetic] to why we have focused on sourcing short duration assets? Why do we differentiate ourselves with long-term assets? We've also demonstrated like you look at our acquisition of a $1 billion portfolio of Anchor Loans, where yields are north of 5%. We don't pay north of 3%, or all-in cost of funds in [Indecipherable] where we pay in the 2s and your cost in funds are high 2s. So you're making -- if you back that up with short-term assets yielding north of 4% to 5%, you're making a very solid spread, but the key is to be opportunistic with your asset sourcing. So, I'm stealing Jim's pun there, I'll let him add in right after this. And then, the second part is to be disciplined could make that mix shift from multi-year fixed rate -- fixed annuities to FIA. Both are key. Jim, you want to add something?

Jim Hamalainen -- Executive Vice President & Chief Investment Officer, Insurance

Yeah, no. That's exactly right. And we have -- we have made the shift and are focusing on FIA now in that channel also, in that particular bank.

Wilma Burdis -- Credit Suisse -- Analyst

Okay, great. Thank you.

Operator

Our next question will come from Erik Bass with Autonomous Research.

Erik Bass -- Autonomous Research -- Analyst

Hi, thank you. So you just have a nice deployable capital cushion today which will certainly support your near-term capital return plans, I was just hoping you could talk a little bit about where AEL sits today in terms of organic free cash flow generation and how that will build over time?

Anant Bhalla -- Chief Executive Officer & President

Hi, Erik. Good morning. It's an [Indecipherable] start, I'll let the others chime in. You're right. We have freed up a good amount of capital like in my answer to Ryan, north of $600 million with our reinsurance transactions and reserve financing. Going forward, what you will see is this migration to ROA assets and you'll see on page 12 of the financial supplement, we've got an addition of notional value subject to recurring fees. As we grow that ROA business, I think a good question you'll ask us over time is how do you make that $3.9 billion, $10 billion, $15 billion or bigger, and as that grows, that is lower earnings on a GAAP basis, because you have to amortize the GAAP gain over the expected life of the policy of let's just say 16 years, 17 years, 18 years, but you're earning those cash fundings over six years to seven years, so a long way in it [Phonetic] we are seeing earnings translation of ROA will be in excess of 100% because cash earnings are higher than GAAP earnings in excess of 100%. And then we look to redeploy, not only grow ROA but write new business where a lot of the capital is coming from third-party sources. So we keep 25% in the ROE side of the house, buy private assets on a nice spread revenue, put 75% in the ROA side of the house on 100 basis points, 150 basis points, 170 basis points, by the way, the Brookfield deal is around 170 basis points as you can see. And that's what will translate into very limited capital, if any needed, from earnings, future earnings, 2023 onwards kind of earnings to fund growth of the liability origination, and therefore, a very high translation into cash generation. It's a very long answer to your simple question, but I'm going to pause and let you ask a follow-on and the do another one, if you want.

Erik Bass -- Autonomous Research -- Analyst

Yeah, that's helpful. So basically, it sounds like you're expecting free cash flow to really ramp up in 2023 onwards and that will be somewhat contingent on kind of diversifying the funding sources. Am I summarizing that correctly?

Anant Bhalla -- Chief Executive Officer & President

Correct. That is correct. Both growing capital to grow the ROA side, plus we're going to have a higher level of earnings. We've -- as Jim mentioned, we're going to be at 4% once we are fully deployed -- deployed in terms of portfolio yield, and then they grow from there -- if we grow the next $10 billion in private assets, and portfolio yield goes north of 4%, that's also going to be higher earnings power coming in. We don't think we are going to need much capital from retained earnings to fund sales growth when you look at 2023 and 2024. And that is very powerful because the earnings power of private assets plus the earnings power of ROA through recurring fees, which is a very high quality of earnings because that balance number, by the way, that you see on page 12, that's not market-sensitive, that's not decrement sensitive, that's locked and loaded for the next six years to seven years, right? That frankly should have a double-digit, significant double-digit multiple on it. So, that earnings power will drive the capital return.

Erik Bass -- Autonomous Research -- Analyst

Thank you. No, that's very helpful. And then just a quick follow-up. Can you talk about how you expect to flow reinsurance agreement with Brookfield to build, or how do you expect volumes to build on that over time?

Anant Bhalla -- Chief Executive Officer & President

We expect that to be -- so it's Income Shield right now, it's what's flowing through [Technical Issues] We are focused on growing income products with the launch of EstateShield, with the launch of Eagle Select, income-focused in the Eagle side. It's only income share right now. We would expect income products like Income Shield to be around $1 billion of sales a year. Frankly, I'd like it to be larger. We are repositioning this company. 2.0 is coming together. We're going to scale that over the next couple of years. I am really focused with this management team to make this the financial dignity company that provides people income or other means of solutions for dignity for life, as we do that, Brookfield reinsurance could grow. But right now, let's just say, a $1 billion a year, we keep 25% back for our balance sheet, 75% goes to them.

Erik Bass -- Autonomous Research -- Analyst

Great. Thank you very much.

Operator

Your next question will come from John Barnidge with Piper Sandler.

John Barnidge -- Piper Sandler -- Analyst

Thank you. Can you talk maybe about run-rate operating expenses as we should be thinking about it into the fourth quarter? And I ask this in light of the Conning and BlackRock announcement. Are there any anticipated severance expenses to be incurred in the fourth quarter?

Axel Andre -- Executive Vice President & Chief Financial Officer

Sure. I'll take it guys. This is Axel. So, as I mentioned, operating expenses were $57 million for the third quarter. We mentioned a reserve financing transaction, which is expected to result in a $7 million save related to that into the fourth quarter, so you already going to -- coming down from $57 million to $50 million. I think high -- we've talked in the past about high 40s to 50s [Phonetic] as being our normalized run rates of operating expenses, in terms of the severance that is already baked into the Q3 number and it actually flows through the NII.

John Barnidge -- Piper Sandler -- Analyst

Great. Thank you very much. And if I could ask a follow-up. You previously talked about a servicing tech platform being part of AEL 3.0, now that we've migrated to AEL 2.0 fully, how should we think about that again, and maybe revisit it? Thank you.

Anant Bhalla -- Chief Executive Officer & President

Hi there, John. [Phonetic] Did you say a service e-broker [Phonetic] -- you said a servicing tech platform?

John Barnidge -- Piper Sandler -- Analyst

Servicing platform built around technology, something I believe you talked about previously as part of AEL 3.0.

Anant Bhalla -- Chief Executive Officer & President

Yes. Thank you for that clarification. Yes. So how to think about it is if you look to the virtuous flywheel of our strategy, all those have come together between go-to-market, investment management, and capital structure. Now, you look at the foundational capabilities of the company. We've always been known as a company that took care of customer service, both the distributor as well as the end-to-end client. And as we look to reposition ourselves, this is not a branding exercise what I'm calling this financial dignity company, it's a reimagination of this company, reframing it as a company that takes care of clients; working with intermediaries, maybe working directly with clients in certain cases. And that will require using technology in the way we service people and delight clients to be a way [Phonetic] we operate.

We've made some investments of that over the next coming years. If we decide to redeploy some capital in that retooling, it will happen. It's something we're looking at how to leapfrog just like what we've done in assets. But it's not something that's going to give you financial results. It's just going to reimagine this company. They did -- if you look at the FIA business, it's an $80 billion in trunks [Phonetic], per every year, the FIA business is $80 billion. Then some of you will ask me why are you not in other annuities, and we can get into other annuities and we'll grow, but it's not just annuities. There is a $1 trillion of assets, in movement in the retirement space. And you can provide financial dignity for retirement and other needs.

So, we are reframing ourselves to work with the producer, with the agent, with the advisor to go after the trillion-dollar market for originating liabilities, not just the $80 billion FIA market. I mean, Jim is going after the multi-trillion dollar market on the asset side that's not serviced by banks or available on Wall Street as structured products through publicly traded securities. So that's what we bring. We're bringing together a much bigger market on the liability side and the asset side together. And technology is a key enabler over there. So, nothing that you can build into the models, but come 2023, come 2024, this company is going to be fishing in a much bigger pond.

John Barnidge -- Piper Sandler -- Analyst

Thank you very much. Best of luck.

Anant Bhalla -- Chief Executive Officer & President

Thanks

Operator

[Operator Instructions] We have a question from Mark Hughes with Truist.

Mark Hughes -- Truist -- Analyst

Yes, thank you. Good morning. Have you laid out -- or can you share 2022 sales target?

Anant Bhalla -- Chief Executive Officer & President

Nice try, Mark -- Good morning, by the way. 2022 sales target, you're going to make my sales guys all get angsty [Phonetic] if I start giving you their numbers before them. But I would say the key point is what Jim and I both mentioned, which is grow fixed index annuity sales and align it with the asset-side opportunities. We've proven through two things, one is revitalizing go-to-market but we are very relevant not only in one channel IMO, but also Eagle Life. So, we have got multi-engines on this plane, if I may use that metaphor or that analogy, to do it. So, go-to-market, so we've got an active [Phonetic] origination platform that's good.

The second is, you can see with our new business reinsurance transaction, not only we are saying the returns are good, but you have third parties validating that to reinsurance with our flow range with Brookfield. And that translates into this ROA platform. We will look at the market opportunities and manage sales accordingly. But I'm not looking to grow sales beyond $6 billion next year. If the opportunity is there between the asset side and the returns on the liability side, sure, we'll do it, or we have the capital for it. But if we think the better return for capital is to give it to shareholders or invest in private assets, and sell a little less, save it in the range where we remain very relevant to core partners, that's what we'll do. We like where we are, we really like where we are.

Hopefully, I answered your question.

Mark Hughes -- Truist -- Analyst

Yes. Thank you. And when you have relationships with PNC and you initiate those with [Indecipherable], is there a contractual or follow-on related to FIA's or your experiences that once you get in the door, you're able to widen up that relationship?

Anant Bhalla -- Chief Executive Officer & President

We have plans to be in that particular distributor with FIA shortly scaling in 2022, but we are ready to go within FIA. It's probably the way I'd tell you. I mean, you'll see the results in 2022.

Mark Hughes -- Truist -- Analyst

Thank you very much.

Operator

And you have a follow-up from Ryan Krueger with KBW.

Ryan Krueger -- KBW -- Analyst

Hey. Thanks for taking the follow-up. Couple of quick ones. Just on buybacks, is the goal to complete that $250 million [Phonetic] for '21 and the $250 million [Phonetic] for '22 by the end of 2022?

Anant Bhalla -- Chief Executive Officer & President

Yes.

Ryan Krueger -- KBW -- Analyst

And then, on the yield, the 4% yield in the spread target that you laid out, do both of those -- do they assume like a normal level of yield on the alternative assets in prepays or is that just like a book yield?

Jim Hamalainen -- Executive Vice President & Chief Investment Officer, Insurance

Yeah, Ryan. I can take the investment question. He asked a side question. That is a normal -- that would be a normalized level of any unusual income, like prepays, for example. So, that will be the core -- that'll be the core yield on the portfolio when we talk about 4%.

Ryan Krueger -- KBW -- Analyst

Got it. Thank you.

Operator

There are no further questions at this time, I would now like to turn the call back to Julie for any 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: 48 minutes

Call participants:

Julie LaFollette -- Coordinator of Investor Relations

Anant Bhalla -- Chief Executive Officer & President

Jim Hamalainen -- Executive Vice President & Chief Investment Officer, Insurance

Axel Andre -- Executive Vice President & Chief Financial Officer

Ryan Krueger -- KBW -- Analyst

Wilma Burdis -- Credit Suisse -- Analyst

Erik Bass -- Autonomous Research -- Analyst

John Barnidge -- Piper Sandler -- Analyst

Mark Hughes -- Truist -- Analyst

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