American Equity Investment Life Holding Co (AEL) 2008 Q1 法說會逐字稿

Good day, ladies and gentlemen. Welcome to American Equity first quarter 2008 earnings call. For opening remarks and introduction, I would like to turn the call over to Ms. Julie LaFollette, Investor Relations. You may proceed.

Good morning and welcome to American Equity Investment Life Holding Company's conference call to discuss first quarter 2008 earnings. Our earnings release and financial supplement can be found on our website at www.American-Equity.com. Presenting on today's call are John Matovina, Vice Chairman; Kevin Wingert, President of the Life Company; and Wendy Carlson, Chief Financial Officer.

Some of the comments made during this call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act. There are a number of risks and uncertainties that could cause actual results to differ materially from those expressed or implied. Factors that could cause the actual results to differ materially are discussed in detail in our most recent filings with the SEC. An audio replay will be available on our website shortly after today's call.

It is now my pleasure to introduce John Matovina.

Thank you, Julie. Good morning and welcome everyone. It's a pleasure to be with you this morning. As we reported yesterday evening, or yesterday afternoon, operating income for the first quarter of '08 was $17.7 million, a 17% increase over $15.1 million in the first quarter of 2007 and $0.31 per diluted share.

Now, before my associates get into some of the details, I'd just kind of like to remind you of some of the specifics. At American Equity, we look at our business as fairly simple themes and the details you'll hear on this call are going to be in line with those themes. We want to grow our assets under management and Kevin will talk to you about the favorable sales results we had in the first quarter and our prospects for continued favorable sales results; earn an acceptable spread, which it did improve in the first quarter and Wendy will go through the details of that; and of course, maintain a high-quality asset portfolio and Wendy will also cover the details about that.

So with that I'll turn the call over to Kevin.

Thank you, John. Good morning, everyone. Great to be with you. First quarter 2008 was a great quarter; $515.2 million of production, up 16% from the first quarter of 2007 at $444.5 million of production. Monthly sales for both March and April were up over $200 million. April was our best production month since, I believe, December 2005, so we're having very solid production results at this point.

A lot of activity out in the field. A lot of things going on. Maybe I'll hit some of the meetings to start with. We've been at a lot of NMO meetings. We've touched well over 2,000 agents since the beginning of the year at 20-plus NMO-sponsored meetings; had certainly good results, good support from the NMOs with service. Good quality products still being the theme from American Equity.

If you look at other meetings and other ways that we've touched the agents, we had our Million Dollar Producer Forum out in Las Vegas again this year. We had 300 producers at that meeting. Those producers would have represented probably close to a billion dollars of production at that meeting. I think the meeting was very, very well received. We got good responses. We're now working hard to get production out of the people that were at that meeting. And about a third, maybe a little more than a third of those producers were producers who had written in the last year with American Equity, so we think there's some good upside potential there.

We've got road shows that began this week using Jack [Marion] from the Advantage group. I would expect that we'll touch 600 or 700 agents or more in those road shows over the next three weeks with the theme of talking about American Equity's products, our Income Riders, and the ability to guarantee income for both Baby Boomers and seniors in their retirement years. And Jack will be doing some training on behavioral selling. So, I think those meetings will go over well.

We continue to have producer forums here in Des Moines. We've had approximately between 250 and 300 agents in the office so far this year and I would expect we'll get up over 700 agents by the end of the year through the producer forums. We're getting a lot more demand from our NMOs to bring producers in to Des Moines, let them get to know the Company, kick the tires, hear our story, and we're able to then turn those agents into either new production or for increased production from those folks that are already writing business with us. In fact, we've got two groups in Des Moines today.

Next week, I'll be in Chicago. I'll be in front of approximately 275 agents from a couple of different groups; marketing groups that are good supporters of American Equity. So there's a ton of activity going on out there, which I think spells good news for production on a going-forward basis.

The Gold Eagle program as you recall is the agent stock option and co-op marketing program. We had approximately 500 agents qualify for that in 2007 and we're up at approximately 450 of those agents, maybe a little more than that of written business again this year. So, we're having a pretty good, doing a pretty good job of holding the agents with that program and we're working hard. I've got my field marketing guys focused on keeping those producers on target.

One of the challenges our industry faced historically was that only about half of the producers that were producing in any particular calendar year would produce the following calendar year. So we're very optimistic that if we can keep these Gold Eagle producers, which are million dollar plus producers with American Equity, if we can hold the high numbers that we're looking at now and keeping those people in production, it will help us not only keep production flowing year in and year out, but allow us to increase production as we bring more people into Gold Eagle program.

[Ron Grimsteiner], our senior field marketing VP is focused on bringing new Gold Eagle members in, and here in about four or five weeks has got two groups of 35 potential Gold Eagle members, guys that aren't writing with us but do write the kind of volume we need for them to get into the Gold Eagle program coming in to Des Moines. So we've got a lot of great activity. We're getting in front of producers, developing those relationships and certainly I think that all of those things are very, very positive.

On the product side, as you guys know, we have been running a commission incentive that runs through June 30. We're still analyzing that to see what we'll do the second half of the year, but I think that program has certainly got us in line with where the competition is from a compensation standpoint. Taking objections off the tables as it relates to commissions where we may have had a competitor or two above us, so I think it's certainly helped open more doors for us and been a successful program.

And we said here today, I do think that we've got some positive things going on, on that side of the business, particularly in the first six months; that maybe even as we look at the latter half of this year our cost of money has been more manageable this year than it was a year ago, so we've been able to bring our cost of money down. I think Wendy and certainly John will talk about that later.

We are also seeing some opportunities on the investment income side. The steeper yield curve I certainly think has helped as we look at investing the dollars as they come in, as well as some market opportunities where folks have maybe opened up some investments that we could take advantage of because of their need to access cash and our ability to generate cash on a going-forward basis.

Also, as we look at the Income Rider, the Income Rider is beginning to get some real good traction in the market. And I think the Income Rider as we look at it out in the future will generate potentially some additional fee income beyond what we need to fund of that liability going forward that would give us some additional funds to work with there. So, I think there's a lot of positive things as we look at the second half of the year. We haven't announced that we're going to do anything with the commission increase, but I think we're well positioned to take advantage of any opportunities that we see in that particular area.

On the income product side/income side, the product sides have been pretty steady. I think our portfolio is very competitive with good flexibility, good benefits, and certainly a good choice of products in terms of ranges of surrender terms, commissions, bonuses, those types of things.

The area where we've been focusing as you know is on the Income Riders. The new Income Rider was kicked out in March with the 7% growth on the Income Rider and the 40 basis point fee. That got us a lot of attention in the market. I think it's done well for us as we've been able to get the administration of that and get the field used to the proper forms in that. We're seeing between 35% and 40% of the apps taking advantage of that Rider. I think it'll probably stabilize and that area could trickle a little higher. Part of the challenge with it is, is when you have to get the field force to sign new forms it slows the process of getting it really oriented and used maybe as widely as it could be used.

We've also just announced -- and I'm real excited about this because it's getting us a ton of attention and I think it's really going to give us a nice kick in activity, getting the phones ringing and getting people looking at American Equity -- we've announced the new version of the Income Rider. We had anticipated from a competitive standpoint that at some point this year we would have to do some new things, so our pricing had looked at various options going forward.

One of the options we had looked at was taking that accumulation value on the income portion of the Income Rider from 7% to 8%. We had considered doing that earlier in the year, but we decided to hold the 8% back and use it at an opportune time from a competitive point of view. We decided that now was the time as of May 1, so on May 1 we introduced an 8% accumulation on the Income Rider, raised the fee from 40 to 45 basis points which we were very comfortable is a conservative number, meaning it's a positive number from our point of view on a pricing standpoint.

So that announcement has really got the bells ringing. We only had one competitor that was at that number, Midland previously, so we've been able to match them and certainly exceed our competition there, and I think we'll see some good benefits of that in production on a going-forward basis.

Competition beyond that, I guess there are really a couple of things I would look at on competition. Allianz just announced that they were going to increase their 15% bonus to 20%, which is an income-rider-only bonus. Effectively, what that income rider does is it makes what would be a traditional annuity a two-tiered annuity. With our products, our upfront bonus is included both in the account value and the income value because the products are priced for an upfront bonus.

Allianz's product, it's a walk-away 10-year product. It's just that none of the bonus which is the sizzle of the product is included in that walk-away value. It's only included in the income value, which effectively turns the contract into a two-tiered annuity because the sizzle of the benefits that's being sold is only available through an income provision. And so, it is certainly a different approach to sales. It's more in line with where they've traditionally been and I think that certainly we can differentiate ourselves and compete very well in that area.

The other product and some of the pricing that's going on that's a little bit of a challenge is -- I think it may be an anomaly in the market for a period of time. What we're seeing is products similar to our Bonus Gold which is a 10% premium bonus product with a total compensation, if you include all overrides and commissions, in the area of 11%. So you've got approximately 21% of acquisition costs all in. American Equity's Bonus Gold spreads that out over a 16-year surrender charge period and we've seen some competition, particularly Aviva, take that same pricing parameter, the same numbers, the 21%, and now put it on a 10-year surrender charge.

You know, I believe it's obviously an attempt to grab market share. It's something that we haven't seen in the market for the 20-25 years that I've been in the market where we're at a relatively low point in interest earnings on the underlying assets and we're seeing the highest acquisition costs that we've seen put on a relatively short surrender charge. So those three things in my mind don't seem to match up and I think the place that probably ultimately suffers is underlying rates to the consumer. Those products are starting out, for example, their fixed rate is 2.75 versus our 3.25 fixed rate. So it looks to me like you probably on a product like that you've got to target a 3.25 to 3.50 spread versus approximately a 2.75 spread that American Equity may operate on that type of a product.

So, I think that you have potential for consumers to be unhappy out here in the future when they're faced with poor renewal rates on a relatively high surrender charge product for a period of years, starting out in the second or third year. So, it's an approach that I don't feel particularly comfortable with. I don't think American Equity feels very comfortable with loading up those types of acquisition costs on that short of a surrender term type product.

So what we're really selling to the field force or the agents is a more competitive rate going forward, better renewal rates which we've traditionally had solid renewal rates on a product that's priced; I guess in our minds what would be more appropriate for the marketplace we're in and certainly more appropriate for the way products have traditionally been priced and looked at from a spread management standpoint.

The final piece is Pending. Pending has been in the area of 2450 to 2550 over the last six to eight weeks, so Pending has been pretty steady, pretty solid. Cash apps coming in the door have been pretty strong for the last four or five weeks, so we feel pretty good about where production is and we're just working to move that Pending up even further.

So, we feel pretty good, a lot of activity, exciting things going on out there and we're out working hard and I feel pretty good about where we're at on the production side. I appreciate your time and I'll turn it over to Wendy.

Thank you, Kevin. And John indicated we were very pleased with the results for the quarter, both in terms of earnings and sales. I'd like to begin the discussion speaking to our spread results for the quarter.

We were very pleased to see the spreads moving again in the right direction. The aggregate spread was 259 basis points, which is an improvement of 11 points over where we were for the fourth quarter of '07. Our results are typically driven by our Index business, 85% of total reserves. In '07, throughout '07, we saw the cost of money on our Index business steadily rise. That's now started to come in again. Our costs on our Index annuities for the first quarter was at 358 basis points compared to 374 for the fourth quarter, so about 16 basis point improvement. The spread on that business then calculates at 256 basis points compared to 243 for the fourth quarter of last year. So essentially, we're back to the level we were at in the third quarter of '07. And as we look now out to the rest of '08, we have reason to be optimistic.

When we think about our cost of money, the cost of money we report in any quarter is a reflection of the costs that we've expended for options during that current quarter, as well as the preceding three quarters since we expensed those options over their one-year term. As we look at purchases we made in the first quarter, our estimate of the costs and the maximum cost of money on the Index business was approximately at 330, so significantly reduced. And we expect those purchases in the first quarter to benefit our cost of money and keep our cost of money moving downward throughout '08.

We were pleased to see that cost at that low level in the first quarter despite the fact that the VICs remained quite high through January and February and March. It was up in the high 20s, at times up above 30. So we felt that our rate cuts have been effective in bringing our costs in line despite a continued high volatility. The decline in interest rates was also helpful in the first quarter as it brought option costs in as well.

As we look now and thinking about second quarter, if you've been watching the VICs you know that throughout the month of April they continue to come down, which should help us with the management of our cost of money for the rest of the year.

In '07, there were a couple of quarters where we discussed the effectiveness of our hedging and lining up option gains with interest credit with the policyholders. As I'm sure you recall, we took a variety of steps throughout '07 to enhance the overall effectiveness of the option program. In the first quarter, we found that the results were on track with our expectations and so we're satisfied that the improvements that we made in '07 are having the right effect.

Turning now to invested assets and investment income, the yield for the quarter was at 6.14%. Our overall net investment income increased to $195.5 million, which is up from $191.1 million in the first quarter of '07. The really interesting thing in the first quarter was the opportunity in terms of our new money investments. It's been a very rare time in the market where despite falling interest rates we're seeing credit spreads at really very wide levels and there are very attractive buys in the market. We put to use over a billion dollars worth of money in new investments in the first quarter. On our new bond purchases, we achieved a yield of 6.61% on over $900 million worth of investments. An in our commercial mortgage loan portfolio, we earned a new money yield of 6.2% on a little over $100 million of new purchases.

The purchases were made both with the net premiums from new sales, as well as calls and sales of existing securities. With declining rates we saw a significant level of calls in our agency portfolio and we had some opportunities to make some sales at attractive levels. So we had a total of $738 million of proceeds that came from existing securities called or sold. Those old securities had an average yield of 5.59%, so we saw a significant pickup in yields on those new investments.

We've seen that trend now continue into the second quarter with the trend of calls continuing, but the opportunities to put the money back to use at higher levels continue to be out there. We really feel well positioned to take advantage of that. It's definitely a buyer's market. Because we've had our strong commitment to credit quality over the years that's positioned us to take advantage of it because we've got very strong liquidity, and because we've avoided some of the problems such as in the subprime market. We have no subprime mortgage-backed securities. So unlike some others who have had to take write-downs and whose liquidity has been impacted by it, that now is turning out to be our gain.

We've been able to achieve some diversification in the new asset categories because of the wider spread without sacrificing any credit quality. As you look at the table in our Supplement that shows the credit quality of the portfolio, you'll see that it's been maintained at over 99% investment grade with over 90% of our fixed income securities rated A or higher.

We have expanded our watch list during the quarter due to market value declines in several industries, as well as the slowdown of the overall economy. So as you look at our watch list, you can securities in various categories with an amortized cost of $90 million market declines of $35.2 million for a value of that set of securities at $54.8 million.

Even with the expansion in the watch list, however, our experience on realized gains and losses during the quarter was very good. The net realized loss was $1 million which is net of tax and DAC. We did have two securities that we wrote down which is within that realized loss balance, but really a very immaterial amount relative to our whole balance sheet.

Other items of note in our earnings for the quarter, we had a decline product charge revenues of approximately $700,000 from the fourth quarter to the first quarter. That results from a reduction in surrenders subject to a surrender charge. It was $89 million of surrenders subject to a surrender charge in the fourth quarter of '07 compared to $76 million in the first quarter of '08. That's a positive trend from our standpoint. Persistency is good. The surrender charges are there and the measure of the duration of the liability may help us invest in longer-term assets that benefit the policyholders through more competitive rates, as well as helping us manage our business by being able to predict the duration of the liability. So the improved persistency is good.

Other costs and expenses were up somewhat during the quarter. They were up $1.3 million in the first quarter compared to the fourth quarter of last year. Roughly half of that increase is related to legal expenses and those expenses stem from the completion of our settlement with Minnesota and gearing up for certification issues in a couple of the other cases.

The remainder of the increase in other costs and expenses is the up-tick in non-deferrable marketing expense that we typically see in the first quarter from all the types of activities that Kevin was describing earlier, as well as some increase in personnel expenses.

Book value continues to increase. Our book value per share excluding the accumulated other comprehensive loss was $12.66 compared to $11.56 at the end of the year. That particular calculation is being affected by the FAS 133 adjustment as well, which I will talk about in a minute. And as you may recall at the end of last quarter, we began publishing a book value that includes both the AOCL, as well as the FAS 133 impact. Coincidentally, both measures of book value this quarter are at $12.66.

Our adjusted debt-to-cap ratio declined during the quarter to 28.7%, and that's true despite the fact that we've borrowed $20 million on our line of credit to fund our repurchase program and our common stock. We have now repurchased a total of 2.3 million shares at an average price of $8.64, so that's been a positive with our book value. The borrowings for that of $20 million have an average interest rate of 4.79%, so an attractive interest rate.

I would note that we also repurchased in the quarter $20 million of our convertible senior debt. We purchased it at a price that was a discount to par. Bad debt carried a cash interest rate of 5.25%, so by retiring $20 million of senior debt there was no change in the overall level of the debt even with the borrowings on the line of credit and some improvement in our overall interest costs.

As we look to the repurchase program now for the balance of '08, we're presently in wait-and-see mode. Certainly, the price of the stock is still very attractive as a buy, trading at a discount to book, but with the improvement in sales and the trend towards increasing sales we want to see where that's going and we'd really prefer to use our capital to support accelerating sales growth. So, we'll take a pause now in the repurchase of our common stock.

Our capital ratios have remained very solid, still over 400% of Company action level is our RBC ratio. We have slipped to slightly below 400% in the first quarter as a result of the sales growth, but there's a component of that calculation that has to do with interest rate scenarios and with declining interest rates that helped us keep that estimated ratio up over 400%.

Our GAAP income was very impressive this quarter at $49 million and that has to do with a change in accounting rules and a change in valuation of the imbedded derivative within our indexed annuity reserves. We adopted FAS 157 effective beginning of this year. FAS 157 deals with fair value measurements and it ties into our fair value calculations under FAS 133. We were required under FAS 157 to use a higher discount rate in the calculation of those reserves than we used in the past, which caused a significant decline in the overall value of the FAS 133 reserves, and that translated into a significant increase in our GAAP income. So, in some ways those GAAP numbers become more obscure with each of these new accounting changes.

I'd like to conclude by focusing on an event that we have coming up here in the next couple of weeks. We have our first Investor Day ever that we will host in New York on Tuesday, May 20. That'll be at the St. Regis Hotel beginning with lunch at noon, and then continuing with presentations in the early afternoon.

We will bringing to New York for that a larger group from American Equity, including several members of our investment staff, as well as accounting and internal control. Of course, Kevin will be there to speak to marketing. So, I'm sure you'll want to hear more of what John and Kevin and I have to say, but it's an opportunity to hear some of the other folks from American Equity speak about the Company as well. And we would invite you to register for that conference through our website.

And with that I'll turn it over for questions.

(Operator Instructions) At this time, the first question comes from the line of Randy Binner from Freidman Billings Ramsey. You may proceed.

Thanks, good morning. I just have a couple of modeling questions. Wendy, you touched on the other expenses and costs. What's a good run rate for us to think about on that? You know, it was up to 12.5 for first quarter '08.

Right. You know, it's hard to predict a run rate given that we've got some various things going on during the year. It's hard to predict when the legal expenses are going to hit in any given quarter and we do have some significant events coming up in terms of certification hearings in those cases. So, at the level that they are now, certainly we wouldn't expect them to increase significantly over that. So, if you looked at the first quarter as an indicator of what the run rate would be for the year, that's probably a conservative way to look at it.

Okay, but that would be almost a million higher, I think, than the previous run rate, right?

I said it's conservative.

Okay. Now, how much -- and that's offset by -- there was some upfront spending you did on the class action stuff. Is that, I mean that helps to offset that as we go through '08, right?

Right.

Okay, and then just to clarify and I'm not sure if I missed this, but the amortization of sales inducements; that level of amortization is just tied to the overall level of profitability we see in the quarter. I mean is there a way to think about that going forward beyond that?

That's related to the growth and the aging of the business, and so all things being equal that should follow a fairly steady trend. We evaluate that every quarter to look at the assumptions in our DAC model relative to our actual experience, and from time to time we're required to modify our assumptions to true those up to the actual experience. But, setting aside those kinds of things, the type of trend that you've seen in our DAC amortization and our bonus interest amortization should remain fairly constant and that's been in general a trend of increasing expense from quarter to quarter of $2 to $3 million.

This is John, Randy. The fact is we're continuing to sell products with fairly high acquisition costs. The product that Kevin mentioned, the Bonus Goal with a 10% bonus to the policyholder and pretty much an all-in cost of 21%, represents three quarters of a percent of our sales and has now for the last couple of years. So, as that business replaces business from five or six years ago that didn't have that level of acquisition costs, you're just going to see the trend move up some, too. And the tradeoff for that is we're looking for higher spreads in that business to cover the higher acquisition costs than from earlier product designs where they weren't so high.

And so, and I'll go in the queue after this, but so I mean I guess to offset that in the model here, you're thinking that your investment yield because of the new money opportunities you talked about, I mean that's a sustainable trend upward through '08? I mean do you continue to see improvement in the overall yield you're able to get?

Well, at the moment we think we can. We don't know what market conditions will be like 30, 60, 90 days from now, but.

And I think where John is going there, is historically we look at these products probably is about a 250 spread, but some of those newer products like the Bonus Gold we really try to push ourselves to a 275 spread because of the higher acquisition costs.

Okay. I'll drop back in. I might get back on. Thanks, guys.

Thanks, Randy.

Your next question comes from the line of Mark Finkelstein from FBK. You may proceed.

Morning.

Hi, Mark.

Any chance you'll give us the cost of money in April?

I don't think we've got a good way to estimate that, other than telling you where we've been purchasing options and that's a very limited snapshot. But you know option costs have remained very low and in some cases even below the 330 that I mentioned in my earlier remarks. So, keep in mind that that's four quarters' worth of option costs and so it's reflecting the current experience as well as the prior quarters, and so it'll take a little time for that to continue to come down assuming those costs remain low.

Okay, and I guess just with decline in the VICs, and I guess all the re-pricings that you did in 2007, are you starting to get pressures from a crediting standpoint or maybe go in the other direction? And I guess, how are you thinking about that in terms of current costs of money?

Yes. You need to break it out into two pieces. One is renewal business and the other is new money. At this point, I haven't really felt, and when I say I, from just being out in the field I haven't felt any pressure on renewal rates. Particularly, I would call the pressure on new money rates fairly slight at this point, maybe a little bit of pressure there. But as Wendy said, we're able to get some better returns on the asset side right now as the new money comes in the door. So, if we do need to move, I would think it will probably be new money on select crediting strategies, but I think we can still keep our cost of money in pretty good shape and probably in real good shape compared to where we're able to put the assets out right now.

Okay, and then just a few questions real quick on the, I guess on the living benefit or the lifetime Income Rider that you do have. Just to confirm, are you still fully reinsuring the longevity risk of those products?

At this point, we're not fully reinsuring it. We feel that there is some profit in there that we'd like to keep for ourselves.

But we do have a reinsurance program under consideration for the new Rider, but it hasn't been put in place yet.

Okay, and then I guess thinking about on the new product, you call it the 40 or I guess 45 with the 8% rollup, what is the spread roughly between that Rider and the reinsurance costs? And should we think about that as excess spread above kind of your target, or is that being built into the overall pricing?

I don't think we've negotiated totally that cost with reinsurers, so we probably would just soon not comment at this point. We don't give them any -- but I would anticipate there will be some spread there.

We have not built in any spread on that Rider in our overall spread expectations, so we're going to wait and see how that emerges.

Okay, thanks. And then, I guess just finally, how do we think about that product from a stat capital standpoint? What are the strains that we should be thinking about, both on a reinsurance and non-reinsurance basis?

I wouldn't think there's much of any stat capital strain. What you're really looking at there is an extension of benefit payout period that the Rider in and of itself isn't going to cause any stat capital strain. Quite frankly, the biggest stat capital strain in my mind comes from the existing penalty-free withdrawal provisions where under statutory stat rules you have to assume the 100% utilization of that 10% penalty-free withdrawal. And these lifetime income benefit riders given the elective nature of them, they fall into something called a nonelective benefit. So, I think the strain -- the strain is already there from the existence of the existing contractual feature for 10% penalty-free withdrawal.

Okay, great. Thank you.

The next question comes from the line of David Levine from (inaudible) Capital. You may proceed.

Hi, thank you for the question. Just a quick question on the balance sheet and I apologize to the other callers. I am new to looking at your company. Why is your business model to leverage your investments due more than two times some of your peers? And I'm not trying to take a jab, I'm just trying to understand.

No, I think what's difficult for somebody new picking up our balance sheet is that we purely sell annuity products. And you know when you put an annuity reserve into your liabilities, the capital level that's need to support that is -- well, on a statutory basis somewhere in the 6% level. So, you see a much higher level of leverage just because of the nature of the business and we're purely in the fixed annuity business. So, I think that accounts for some of it.

As you look at the true leverage, which is the leverage that relates to our borrowed money to support our overall capital, as we talked about earlier that's at 28.7%. That's an adjusted debt-to-capital ratio, and when we say it's adjusted debt, it's taking into account the equity portion of our trust preferred securities that are reflected as the subordinated indebtedness on our balance sheet. So at a 28.7% leverage ratio, that's completely in line with our ratings and probably would suggest a higher rating than we currently carry and is not significantly above our competitors.

Thank you very much.

The next question comes from the line of Beth Malone with KeyBanc. You may proceed.

Okay, thank you. Congratulations on the quarter.

Thanks, Beth.

If you look at the market environment that we have right now with lower interest rates and unstable kind of poor returns on the stock market, is this environment similar to a previous period. Again, you see how demand for the products reacted previously. I mean does this look like 2005 or something in terms of its market conditions and demand for the product?

Yes, it's probably -- I would think it would be a lot closer to the time periods when you go back to 2000/2001. You had CD rates fall and you had the stock market struggling. You had tough press going on, on that, so I would say that would be true to some extent. Probably the yield curve issue, the yield curve has started to straighten out. That started to help us, and I think as we've moved out of the flat yield curve we're starting to get some benefits from it.

On the other side of it, I think it's a solid market for our business, but it's still a pretty uncertain market out there just because of the way the press and so forth is. So, I think we're going to make good headway. I think these Income Riders will help us a lot as people look at trying to lock down their retirement income. So, I'm optimistic it's going to get better. I think one of the challenges we face right now, as I talked about earlier, where some of this product pricing that in my mind just is very -- isn't logical, isn't supportable necessarily, but you've got to deal with it out there. So, that would probably be a bigger challenge for us in this market than anything else.

Okay, and then just another question on the distribution. You all have about 52,000 agents now and that's been a steady number for a while. Is there any thought to going through and reducing the number of agents in order to improve the expense costs?

Yes, that process has started, Beth. We've started going out to agents who have been producers, giving them an opportunity to send us an app, or we'll start the termination. So I would think that you'll start to see some modest reductions this quarter with probably some acceleration in the reductions as we go through the rest of the year. And some of that could be offset by new recruiting, but you will start to see some numbers coming down.

Okay. All right, thank you.

Thanks.

And the next question comes from the line of Bill Dezellem from Tieton Capital Management. You may proceed.

Thank you. We have a group of questions. First of all, you had referenced you had some important class action certification hearings coming up. Were there any in the March quarter that were noteworthy?

There was a hearing that was begun, but with all things legal it's dragged out. So the first half of it was held, if I remember right, early in March and then there was another half that was held here recently and the outcome of that has been postponed until yet another hearing on a motion for summary judgment that we are filing, and that will happen in May. So yes, there were developments in that case. The certification process in the other California case is just now beginning. A motion for certification was filed by the plaintiffs and we're in the process of filing our opposition, but that will extend out over a period of several months.

Thank you and then in the press release you mentioned a number of reasons why you were seeing success in your growth in new business, but you did not mention agents moving away from some of your competitors that have had regulatory problems. To what degree is that a reason for sales growth and how important do you view that in the overall big picture?

I think that obviously Allianz has had some press that has been less than flattering over the first quarter and end of last year, so I do think we picked up some significant gains there. It's a little bit hard as you deal with an agency group of 50,000 agents and in any given quarter 2,000 or 3,000 who send you an app to identify which ones are moving specifically from Allianz. But I do think that as I'm in the field talking to producers, I do talk to a fair amount of guys who said that they just don't want to deal with it anymore and are looking for an alternative.

One of the other things I have heard, although I've not seen this in writing, is that possibly Aviva has replaced Allianz as top producer this quarter, and some of that I would anticipate given their pricing would be driven by Aviva's aggressive product pricing. But I think a part of it is also driven by maybe some fall off in production by Allianz, so I do think that that's -- that has had some effect and I'm sure we've been the beneficiary of some of that production. It's not always necessarily best to be number one, at least as far as -- Allianz was so far ahead of everybody else that I think they've drawn a lot of attention to themselves and their products given the two-tiered nature of them, leave some opportunity for criticism out there.

And then finally, as you look out over the remainder of 2008 and we understand it's early, but would it be fair to say that the first quarter should be your lowest operating income quarter; meaning the $0.31, due to the fact that your spreads are stable to improving and your invested asset base is growing?

Well, as you know we don't give guidance, but as you look at the historical trend that has typically been true, that the first quarter is our lowest quarter. And then with additional production and now with our hopes for improved spreads, we would hope that that would be the trend.

Great. Thank you both.

Thank you.

The next question comes from the line of Randy Binner for Freidman Billings Ramsey. You may proceed.

Yes, thanks, just a quick follow-up question on the commercial mortgage portfolio. I didn't see a lot about it in the Sup. Can you give an update or any color on that as far as LTDs, delinquencies and how that is holding up in the soft economy?

Sure. You didn't see it mentioned because there was nothing new to report. We've continued to build the asset class. We've had no defaults, delinquencies or restructuring so it continues to perform perfectly. And we have no reason to be concerned about it and every reason to continue to think that's a very good asset class for us.

Okay and where is the -- do you have an update on LTD or is it just similar to where you were before?

It's similar to where it was before. I think it was at 67% and don't know-.

67 or 68, yes.

And I don't know of any change from that.

The investor presentation that we use for our meetings in that will be updated within the next couple of days and it'll be posted on our website and there's a page in there with some of those statistics you were asking about, Randy.

Okay, great. Thanks.

And at this time we don't have any follow-up questions from the queue. I will turn the call over to management for closing remarks.

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.

Thank you, ladies and gentlemen. This concludes the presentation. You may now disconnect.