American Equity Investment Life Holding Co (AEL) 2009 Q4 法說會逐字稿

Welcome to the American Equity Investment Life Holding Company's fourth quarter, 2009 conference call. At this time, for opening remarks and introductions, I would like to turn the call over to Julie LaFollette, Director of Investor Relations.

Good morning and welcome to our American Equity Investment Life Holding Company's conference call to discuss fourth quarter 2009 earnings. Our earnings release and financial supplement can be found on our website at www.american-equity.com. Presenting on today's call are Wendy Waugaman, President and Chief Executive Officer; John Matovina, Chief Financial Officer and Vice Chairman; and Ron Grensteiner, President of the Life Company.

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 those 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 Wendy Waugaman.

Good morning and welcome to the call to discuss our year-end, 2009 results, as well as the fourth quarter. We've had just an excellent year. In fact, it was a record-setting year in all ways with sales at $3.7 billion; record spreads which drove record operating earnings for the year of over $101 million, $101.8 million, which is $1.75 per diluted share.

The fourth quarter of '09 was also a record quarter with $28.7 million of operating earnings. That's $0.48 per diluted share. That represents a very large increase, an 86% increase over fourth quarter of '08, and we saw continued strong sales in the fourth quarter at $900 million, of which we retained $655 million after coinsurance. We've continued to have very strong spread results for the fourth quarter at 3.04%.

Our GAAP net income was $36 million for the quarter and $68.5 million for the whole year. The primary difference between GAAP and operating income is the FAS 133 adjustments on our reserves for our indexed annuity business and to a lesser extent, the OTTI impairments that we recognized in 2008.

We finished the year with a very strong RBC ratio at 337%, which is comfortably above our minimum target of 300%. That represents a pretty dramatic swing from where we were at the end of the third quarter of '09. A couple things happened there. One, the PIMCO re-rating process that was a part of the NAIC rule change had a much more dramatic impact than we anticipated and was very positive. John will discuss that in more detail. In addition to that, we had a very positive swing in our statutory net earnings from operations in the fourth quarter, due primarily to a reduction in tax expense that related to a change in tax accounting, but both the statutory earnings and the PIMCO re-rating had a big impact on our year-end RBC ratio.

So, as we look back at '09 and the many steps that we took during the year to support our regulatory capital, we feel real good that those efforts paid off during a period of very dynamic growth for the company. So as we enter 2010, we're in a extremely good capital position and that's going to be helpful because the sales environment continues to be very good and Ron will be discussing that a little bit later.

Before I turn it over to John, I'll just wait and make one more comment on the progress that we've made in addressing our indebtedness under our senior convertible notes. There's a first put date in the fourth quarter of 2011 and there's been some commentary on that indebtedness. We've been chipping away at that for some time now including, in 2009, the exchange of $37 million in the second quarter of '09 for common stock. We did that exchange at a time when the notes were trading at a very steep discount and so it was favorable from the standpoint of the price of the stock that we recognized on the exchange.

In addition, in the fourth quarter, as previously announced, we exchanged $67 million of our old notes for a new issue of senior convertible notes that have very similar terms but a longer maturity and the first put date is pushed out three years to 2014. So having started with $260 million of senior convertible notes that we issued back in 2004, there's now $81 million of that remaining so a lot of progress on that and that, along with our bank line of credit, we'll be addressing during the course of the year.

In addition, when we issued our new convertible notes, we had an opportunity to issue some of those new notes for cash. We raised $52 million of new cash through the issuance of the convertible notes. We feel very good about that because it gives us a war chest as we go into 2010 that will help us support what we think will be continued strong growth or to pay down debt as needed.

With that, I'll turn it over to John to discuss the detailed results.

Thank you, Wendy. As Wendy commented, the record earnings were driven by spread results, which have been on the upswing throughout the year. During the fourth quarter, our net investment income was $243 million. The resulting yield would have been 6.23%, which is several basis points lower than where we were for third quarter, but during the fourth quarter, we had about $2.5 million of non-recurring expenses classified as investment expenses. Those were expenses that we incurred in conjunction with the Re-Remic transaction that was discussed on the third quarter call and that transaction was abandoned in the fourth quarter.

Regulatory developments made the accounting for that impractical and in fact, the need for the Re-Remic was also then diminished by the PIMCO re-rating process that resulted in adjustments to the ratings of the RMBS securities to recognize the economic values as opposed to just the risk of first loss. So, excluding that $2.5 million of Re-Remic expenses, our yield for the quarter would have been 6.30%, 6.3%, and just a reminder that we also had, in the third quarter when we earned 6.38%, we had about 7 basis points of investment yield from non-recurring income items, primarily some restructuring fees on a couple corporate bonds, so all-in-all, the yield was relatively flat from third quarter to fourth quarter at the 6.30% level. For the year, we also ended up at 6.30%.

At the current environment, investment opportunities are at lower yields than the existing portfolio and as a result, we have adjusted our rates down on new money. That was largely a 15-20-25 basis point adjustment made back in November, so our rates we're offering to policy holders are in line with what we're able to invest new money at. The cost of money for the year was 3.26% and in fourth quarter, 3.19% and that reflects the continuing low hedging costs and allocations of money to that fixed-rate strategy, which are now, as I say, at the lower rates. The net result is we end up with spread for the year of 3.04% and also for the fourth quarter of 3.04%, so very high levels of spread in particular, relative to our historical measures.

During the fourth quarter, we invested some $637 million into investment securities. The allocation was about $298 million to agencies, $275 million to high-grade corporates, and $63 million to taxable municipals. The average combined yield on those securities was 6.25%. We did have, as we've commented previously, throughout last year a number of calls on the agency bond portfolio and as a result, we reinvested about $5.1 billion last year of money from either call agency bonds, principal paydowns on the RMBS and sales of other assets.

The calls that were in the fourth quarter were about $1 billion. The average yield on those calls was 6.11% and for the year, the $5.1 billion of calls had an average yield of 6.18%, so throughout last year, we're able to reinvest the called assets at yields that were slightly above the yields that the assets were being called at and that helped move the investment yield from a 6.20% level in 2008 to the 6.30% level last year.

As a result of the calls, we've had significant changes in our asset allocations. The allocation to agency securities is down from 52% to 36% and then similarly, the allocation to corporates has moved up some, from 14% to 26%.

During 2009, our commercial mortgage activity was at a slower pace than in the past several years. In the fourth quarter, we've funded about $100 million of new commercial mortgages at a blended yield of 6.90%. For the year, we were at $249 million at a blended yield of 6.91%. Our current rates are in the, primarily a target of 6.75%, although we have made a handful of loans at 6.60% to 6.50% level.

In terms of the RMBS, I think the issue of the ratings migration is now behind us with the PIMCO re-rating. Of course, the purpose of that was to align the ratings and capital requirements with the expected economic loss in those securities. The rating agency ratings do not deal with the expected severity of the loss on those securities, merely the risk that there will be some loss. As a result of that, we had over $773 million of RMBS restored to an NAIC designation of 1 or 2.

We also had $302 million of RMBS that was previously classified as NAIC 6 restored to a higher rating and I think if you can look in page 12 of our supplement, you'll see some pretty detailed schematics of where the RMBS end up at for the year. Based upon the NAIC designations, we now have 97% of our fixed income security portfolio rated in designations 1 or 2, which are the investment grade designations for the NAIC. Based upon the credit rating agency ratings, we're at 90% investment grade, so you can see a fairly significant movement from the PIMCO rating and of course, those are the ratings that are used to determine the risk-based capital requirement and used in the evaluation of capital adequacy.

A couple of other comments about the RMBS and you can see this information on page 12 that I just referred to. We have over 82% of the portfolio is sitting in agency or prime-rated securities. And if you look at one of these tables, the fair values of those securities, particularly the securities that we have not recognized any other than temporary impairments on, that's about $1.9 billion of a $2.5 billion portfolio. The market value of those securities is 97% of our amortized cost, so I think the values are there and we certainly would interpret that fair-value measure as an indication that those securities are not at risk for any impairment at this time.

We have a group of securities in which the OTTI has been recognized or we've recognized OTTI, and those have fair values of 76% of the amortized cost, so there's been a significant narrowing through the recognition of impairments through the course of the year between what the fair values are and what the amortized cost is, so we now sit at the end of the year with overall, the RMBS is 91% fair value to amortized cost or $247 million, so that exposure for future loss based upon fair values has been diminishing.

Turning to commercial mortgages, the portfolio's been fairly steady at the $2.4 billion range. That's 16% of total invested assets at the end of the year, which would be down from 18.3% at the beginning of the year. We had relatively little activity in terms of troubled loans during the fourth quarter, actually, no new foreclosures. We ended the year with four properties converted to real estate owned. We have three that we'll either go through foreclosure or we'll take a deed in lieu of. We had 23 properties where we have modified the terms, primarily to convert the loans temporarily to an interest-only status. Those aggregate about $60 million. No further impairments in the fourth quarter, so the total impairment loss recognized on commercial mortgages was $6.5 million for the year.

The portfolio continues to be highly diversified. Just over 1,000 loans with an average size of $2.5 million and one of the points we've stressed repeatedly throughout our communications is the fact that we believe the prudent underwriting standards that have been in place from the very inception of making these mortgage loans are going to serve us well in terms of minimizing the risk of loss and those are things like requiring borrowers to have 25% hard cash equity in front of our loan.

The average loan-to-values at the time the mortgages were made, relative to appraisals, were 57%. That provides a significant gap for erosion of value before we start impeding the principal balance of the loans. Then, we have 58% of the loans where we have either full or partial recourse. That recourse includes the master leases that we have on a number of the properties.

Back to securities. Our watch list of securities is down significantly from a year ago and down further from the third quarter. Total amortized cost is $64 million with a fair value of $58 million, so about a $5.5 million unrealized loss in those securities. The majority are in the financial service sector and a significant element of the decline from a year ago is the fact that we had quite a few securities, particularly perpetual preferred stocks of financial institutions that were significantly under water at the end of last year. Those securities have seen a substantial price recovery as the financial institutions, although not out of the woods yet, but they have come back in terms of pricing.

DAC amortization is back to normal pattern. I think a year ago in this time, we were talking about unlocking. There was no unlocking necessary in 2009 and would not really expect any on the horizon at this point in time either. Our book value per share, $13.08, including the Accumulated Other Comprehensive Loss, and $13.61 excluding that, slight improvement from where we were at the third quarter.

Our ROE for 2009 based upon our operating earnings was up to 14% compared to 11% last year and a big element of that improvement is going to be the record earnings we had. Also, in 2008, the unlocking impact did result in some negative impact on operating earnings, which would have impacted the ROE.

Our debt-to-capital ratios are 28% at year-end '09, versus 29% a year ago. So we were able to reduce the ratio even with the issuance of some additional debt under the line of credit, which we borrowed $75 million during the year and issued the $52 million of new convertible notes that Wendy discussed earlier. Obviously, the equity has gone up from our earnings in the issuance of the common stock for the debt-for-equity exchange in the second quarter.

Turning to looking to 2010 a little bit in reinsurance. As you know, one of the things we did to manage the capital last year was to enter into a coinsurance arrangement to cede off 20% of our index annuity business. That allowed us to kind of keep the business that we retained at a $3 billion level. We have continued that reinsurance at the 20% level of index product for the first quarter. We're working on updating our corporate model to assess the degree to which we might need coinsurance for the balance of 2010 as a source to manage capital position.

Of course, our ultimate goal is going to be to retain 100% of the business we can produce, but we'll do that only if the capital structure and the capital we can raise at an acceptable price supports that action. I think that's probably a pretty good segue for Ron to let everybody know about the wonderful sales of last year.

Thank you, John. Good morning, everyone. 2009 was certainly a record-breaking year in about every category you can think of. As Wendy reported, we hit our production goal and then we shattered it with $3.7 billion for the year. Our fourth quarter was also very strong with $900 million, compared to $554 million in the fourth quarter of 2008. That's a 62% increase.

We had a very strong sales climate all year long due to the uncertainty of the stock market and low interest rates and other safe money alternatives like bank CDs and money markets. Several of our competitors also contributed to our sales growth by reducing their sales targets and taking some rather drastic measures to slow down their sales growth. American Equity was in a position to accept the business and it is our intent, certainly, to keep those producers on board by giving them the best service experience that they've had from any insurance company.

One of the measures of success that we look at is the number of Gold Eagle members that we have. These are producers who write at least a minimum of $1 million in production for the calendar year and in 2009, we had 890 Gold Eagle members, which compares to 566 in 2008. That's a 58% increase in Gold Eagle members. These producers were responsible for just over $2 billion in production or 57% of our 2009 production.

We're starting 2010 out in a very strong note. We had a record-breaking January with $236 million in paid production. January and February are historically low production months as producers get back to work and start filling up their activity pipelines.

Our current pending count is at 3,190, which is about where it was this same time last year. I think there are a number of factors that were off to a good start. One, not much has really changed with market volatility and interest rates and the CDs and money markets are still rather low. A second is there's a lot of fear of higher taxes and of course, tax-deferred annuities would fit the bill quite nicely for that.

Third, I think there's some positive publicity for annuities. We've seen a number of articles, even from the current administration, talking about annuities and the guaranteed income that they can provide for retirement, so that certainly helps. And it doesn't hurt that we have some very strong momentum for a record-breaking 2009.

Some of our competitors are beginning to re-emerge, but they don't seem to be nearly as aggressive as they have in years past. We are doing our darndest to keep those producers focused on American Equity. I think we're successful in a large part. We won't be able to save all of them, however, but we're going to work very hard at it.

We have a slogan as we travel to different, various agent groups. Our slogan is, "Don't go back," in that we tell these agent groups that we were there for them in 2009 when they needed a place to put their fixed-annuity business and we're going to be there again in 2010, so they don't need to go back to where they were. Come and stay at American Equity.

Next week, we are having our fourth Million Dollar Producer Forum. This is a very big event for us where we solidify existing relationships and build some new ones. We will have over 600 attendees, which is our biggest ever. Last year was a record, too. We had 530 attendees at that one. To attend, the producers have to be able to document that they wrote at least $1 million or more in fixed annuities in 2009 and out of all those attendees, 41% of them wrote their $1 million with other companies. So, this is a wonderful opportunity for us to showcase our company and try to build some of those new relationships.

Our theme for 2010 is consistency. You know, in a very turbulent year, American Equity was very successful and it wasn't by accident. We've worked for years at doing what we do. It just became more apparent in a crazy year like 2009 that, you know, we've had some consistent things that we've done.

We talk about consistency in our management team, for example. Our senior management team's been together a minimum of 20 years and when we're visiting with producers, we talk about, you know, how can a company be consistent in its actions if its management team is not consistent. We talk about consistent relationships. In our 15 years here at American Equity, we've retained nearly all of our key NMO relationships and I think that says a lot.

Consistency in production. Since American Equity started, according to the Advantage Index Sales and Market Report, American Equity broke into the top ten for quarterly indexed annuity sales in the third quarter of 1998. We broke into the top five in the first quarter of 1999 and we've been in the top five, 38 out of the last 44 quarters, so I would certainly say that's consistent.

We've been consistent in our asset quality. We've been consistent in our products. Again, according to that Advantage Report, our Retirement Gold and our Bonus Gold were ranked number two and three, respectively, in the fourth quarter of 2009. And, of course, service, and folks, that's where the rubber really meets the road here at American Equity. I'm so proud of our staff that work so hard to maintain our service reputation, especially in a record-shattering year like 2009 and we shout from the mountain tops every opportunity that we can that, you know, if they want to sell a product, there's lots of companies that have good products, but if they want a relationship with a company that's got good service and will take good care of them and their policy holders, American Equity's going to do it. So, that's kind of our theme and that's where we're headed in 2010 and with that, I'm going to turn it back over to Wendy.

Thank you, Ron, very, very good job. I'd like to conclude with some remarks on 151A and where we are, which is still in a state of uncertainty. We're awaiting the court decision on the issue of the remedy that was granted. As you recall, initially, we received a remand, but without vacating the rule or taking it off the books. That left intact the initial effective date of January, 2011, but with no deadline on the response by the SEC to address the defects that were identified in the course of the remand.

There was one of the companies that are part of the coalition that asked the court for further clarification of the effective date. The court has asked for a briefing on a couple of different occasions on whether it should reconsider the issue of remand. In the course of that briefing, the SEC consented to an additional two-year delay from some future date on which any reissued rule 151A is published.

Now, that future date depends on a lot of things happening. First of all, the SEC is working on its 2(b) analysis, which is what was lacking the first time around. They've indicated that there will be a new notice and comment period for public comment, although that might be a shortened comment period, now in a second iteration. The Commission itself needs to vote on whether or not they're going to retain the rule and then, of course, there's the possibility of more litigation after that.

So the point in time at which there is any re-issuance of the rule, if there is any re-issuance of the rule, is fairly uncertain at this point and we believe that the earliest that any rule would become effective would be late 2013, so lots of time now to get prepared if the rule should go into effect.

We continue to work very hard against it. We are hopeful that the court will vacate the rule, but of course, we've got no insight into what the court is going to do until they come out with their ruling and that's expected, really, at any time.

There continues to be a lot of momentum on the bills that we have pending in both the House and the Senate. We now have at least 75 co-sponsors in the House, 15 in the Senate. As the broader issue of financial regulation reform is debated in Congress, we're hopeful that our bill can be included in the consideration of that discussion. We have another fly-in of producers to Washington to speak to their congressmen coming up here on March the 17th. The timing of that is very key since these issues are being debated right now in Congress. So, we're hopeful that the bill will gain some traction and have a better opportunity to be passed.

In the meantime, we continue to work on being prepared to sell registered products. As we've talked about in the past, we formed a brand new subsidiary, a life insurance subsidiary called Eagle Life Insurance Company through which to sell registered products. We've been working now for over a year on getting Eagle licensed in all the states where we do business. Currently, it's licensed in 31 states, including the states where there's a significant market concentration such as Florida, Texas, California and others.

In addition, as you know, we filed a registration statement for our first registered, indexed annuity. We've gone through several rounds, or two rounds, of comments now with the SEC and we believe that the registration statement should be declared effective in the very near future. In the meantime, we work on infrastructure issues to be able to sell into the broker-dealer channel, including various technology requirements as well as building our B-D relationships. All of that seems to be going very well and we would anticipate being in a position to begin sales of registered products long before any effective date of a re-issued rule, if there ever is one. And if 151A never becomes effective, then we look at Eagle Life and all this effort as a potentially important new revenue source.

Turning to the litigation front in California, there's really nothing new to report. We do have a trial date in our San Luis Obispo case of September, 2010. That's a case that we may in fact, go to trial. The settlement opportunities do not look promising and in the other case, there is really not a lot of movement going on. On the wells front, there has been significant progress made towards a resolution of that issue. We're hoping to have something final to report in the very near future.

With that, I'll turn it back to the operator for questions. Thank you.

(Operator Instructions).

Our first question comes from the line of Randy Binner, FBR Capital Market.

Oh, hi. Thank you very much. I guess, Wendy, just the comments on 151A sounded good, so I guess could you -- is there any way to quantify what a shortened comment period might be?

Well, it could be as short as 30 days, so you know, we just don't know what kind of a comment period will be permitted, but it could be as little as 30 days.

And then with the earliest implementation by late 2013, would that contemplate further litigation?

It's very likely that there would be further litigation if this rule continues to move forward, so, yes.

Okay, great. And then I guess one for Ron. You know, you said the words competitors are not nearly as aggressive as they were in the past, but at the same time, I guess, there was really some question at the end of last year of whether or not Aviva might kind of be back, so I'd be interested in any commentary on those big foreign companies you compete against.

Well, Aviva is out and they are talking to distribution and telling them how they want to earn their business back and those types of things, so they're out there. We just don't see or hear from them as much, through sales contests or you know, new product development or you know, those types of things. They haven't made any big changes in their rates or changes in commissions, those types of things. They're, from their standpoint, they just seem to be out on the street again, saying they want business in 2010.

Well, I'll do one more and then get back in the queue, but I mean, I guess, if that's the case, I mean, how much does that affect the reinsurance conversation and thoughts on that, either John or Wendy?

I'd say it's a little bit premature to respond, Randy. The analysis we had a year ago was that we could write at levels of $3 billion a year and our capital would support that. That's the number we're updating at this point in time, to get confirmation of that. I don't have any reason to think that's going to be any different. So, we would be looking to retain $3 billion, perhaps even a little bit more this year in production.

All right, fair enough. I'll drop back in. Thank you.

Thank you. Your next question comes from the line of Mark Hughes from Suntrust.

Thank you very much. Any historical perspective you might provide where you had sales disruptions like this? How sticky are the new relationships? Obviously you're in a position of trying to retain those. Any historical example we can use as a guide?

I'm not sure I have a historical example. I think it's just more from visiting with the people as we see them. There are -- some of the companies did such drastic measures that they basically, in my opinion, turned their back on their producers. I call it, they kind of left the people that brought them to the dance at the dance and went home with somebody else. I think a lot of those producers and marketing companies really took it personally and were rather upset about it and they tell us this. So, based on our conversations with them, we feel good about we're going be able to keep a lot them.

At the end of the day, though, when I say we're not going to be able to save all of them, if some of the primary competitors come out with the greatest thing since sliced bread, at the end of the day, they're all business people and they're going to want to jump on top of it, but I think jumping on top of it will be at a not quite as enthusiastic as maybe it would be otherwise.

Yeah, you'd mentioned, I think, in the forum you've got upcoming, or maybe it was last year that 41% had their business with other companies. Do you sense in the numbers this year, what the year-over-year comparison with that percentage? Are more people shopping around for new relationships?

That is probably pretty close to our forum from 2008 where generally it runs between 40% and 50% of the attendees are people that wrote their $1 million with other companies, so to me, that says that there's a lot of producers out there that haven't discovered American Equity yet and we just need to keep after them and keep telling our story because if you've got 40+% last year and 40+% this year again, those are I think, very encouraging numbers for us.

Right. How about the trend in the allocation of new sales to the fixed rate strategies? Do you that will be continuing into Q1? Where do you see that going?

For the year last year, I'd say, John, if you can confirm this, but I think over 50% of the premiums coming in the door last year were allocated to the fixed strategy. I didn't see a big change in December, for example, it was 50% of the money was in the fixed strategy and for the year last year, it was 54%, so I think it just depends on what the stock market's going to do and if people are going to want to link it to the S&P or the Dow again. But I don't see personally, huge changes in the money shifting away from the fixed strategy at this time.

My observation was I don't know exactly when, but sometime in the second to third quarter, we reach the peak in terms of the monthly amount going to the fixed strategy. That would have coincided with the revival of the market and people deciding to move a little bit more money on the new business side into the index strategies and at 50% in December, would have been one of the lower months of the year in terms of the allocation, as indicated by the fact that for the full year, it was a 54% allocation.

I understand. Thank you.

Thank you. Your next question comes from the line of Paul Sarran, of Macquarie.

Good morning. My first question is on capital. Ending the year with an RBC of 3.37%, that suggests about $135 million above the 300% target by my calculation and then, further ability to manage capital with reinsurance, do you still see an immediate need for the $50 million at the market program? And if you don't, what's the reason for keeping it open?

We are debating that, Paul, as we speak. We had the opportunity to raise additional capital through the convertible note issuance in the fourth quarter. That provided the financial flexibility that we really were looking for and so as we think about the ATM offering, we want to, first of all, complete our corporate modeling process and look at what we can produce and what the capital requirements will be for that and then make a decision of where we head with that particular offering.

It is our hope that we can use the new cash that we raised to continue to pay down debt and then our capital from other sources will be sufficient to address the growth, so at this point, no final decisions have been made, but that's certainly something that we are thinking about.

Okay and one other question on the broker-dealer channel. What -- is there anything that gives you confidence that you'll have success selling a new registered product through that new channel? Can you give any additional color on your strategy there, such as what type of brokers you're targeting, what you're approaching them with and what kind of reception you've gotten from them so far?

A lot of those questions are premature in terms of detailed conversations with broker-dealers. But in terms of the broader question of whether or not this product will be successful in the market, you look at what's happened in the last two years. Sales of mutual funds and variable annuities are down dramatically. Complaints concerning variable annuities have been soaring; all while sales of our products have been very, very strong. Complaint levels are very, very low.

We think that this is an ideal product to fill what has to be a hole left in a lot of broker-dealer operations from sales that they would have otherwise made in mutual funds and variable annuities and it comes at a time when, as Ron mentioned, there's been very favorable publicity about the use of fixed annuities as an important part of a retirement plan and a guaranteed retirement income stream. So we think that the tide is turning in terms of public perception of the products in that it represents a significant profit opportunity for the broker-dealers and a product that they've overlooked in the past, but really the time has come. So we think it's a great opportunity.

In terms of looking at the specifics of the channel, we've done a lot of work in looking in all the different major categories, from discount B-Ds to bank-based broker-dealers to wire houses and more localized and regional broker-dealers. We think that the opportunities lie more in the regional and localized broker-dealers, as well as banks, and to a certain extent, the discount broker-dealers. So, we're working on putting the building blocks of that together and that's just going to take more time. But we're optimistic.

Okay, then just one followup. If rule 151A were to be vacated at some point, would you continue this strategy of broker-dealers?

Yeah, absolutely. As I commented before, we are also very optimistic that 151A will be defeated. That would be our perfect world because then our existing distribution channel --

(Technical Difficulty)

Thank you for your patience. We're trying to reconnect with the speaker.

Our speaker has rejoined. And we'll take the next question, will be from the line of Bill Dezellem. Please proceed.

Thank you. A couple of questions. Let's see, first start on the balance sheet. There were a couple of line items that were present in the third quarter but not in the fourth quarter. The first was the funds withheld reinsurance liability and the second was the amount due under repurchase agreements. Would you please share with us the details behind those disappearing?

And there's a third one, Bill, too, trading portfolio in the investment section. The trading portfolio and funds withheld relate to the reinsurance arrangement with Athene and as a foreign reinsurance company, the way we perfect our reinsurance credit for regulatory purposes is through what they call a funds withheld relationship or arrangement where the assets remain on our books. The investment management of those assets is done by Athene and subject to an investment management agreement that was negotiated with us and all of the investment income, then, off those assets flows directly to them.

Our interpretation of the applicable GAAP reporting was that those should be on our GAAP balance sheet when we issued our 9/30 financial statements and upon further discussion and investigation with KPMG, our auditors, as we were finalizing year-end, the determination was made that those should not be reflected in our balance sheets, so you don't see them in the 12/31 balance sheet then. Intuitively, that kind of makes sense. As I said, the economic benefits of those assets are for the benefit of Athene and the portion of the business that they've reinsured with us.

On the repurchase agreements liability, we operate the business -- our preference is to have a repurchase agreement liability. What we're attempting to do in management is to prefund the investments from new annuity sales so that we don't end up with temporary cash and earning very low rates of return. So our standard practice is to borrow funds, buy the assets and then as the annuity premium comes in, the liability is repaid and in fact, we keep repeating the process.

Over the last several quarters, we've had, as I commented earlier, significant amount of the agency bonds have been called and from time to time, that's the first thing we do with those calls is pay down the repurchase agreement balance and at year end, we had some calls and actually some sales of some assets as well that resulted in the repurchase agreement balance being paid down to zero and we ended the year with about $100 million of temporary cash investment that invested in January.

Actually, on comparative basis, we had no repurchase agreement liability at year-end 2008 and actually, I think in 2009, there might have only been one quarter, the third quarter, where we had such a liability because of the call activity that's occurred throughout the year.

That's helpful and then shifting to the commercial mortgages, the level that you had in terms of new mortgages in the fourth quarter at that roughly $100 million mark was at a run rate through then the full-year level of $290 million or so, I think you'd mentioned in the opening remarks. Does that imply that something favorable is developing in that arena? I guess tied in with that question, that commercial mortgages dropped as a percentage of the total portfolio in 2009 and so does that indicate that demand from qualified buyers was just not there or indicate a level of caution? I think those two questions probably tie together.

I think that the $250 million for the year, yeah, there was more approved in the fourth quarter, that we have been, I think, more selective in our valuations of what we would do. We've kept our rate up at what we feel is an appropriate level for us and that might be causing some of the demand that might come to us to go to alternative sources for their mortgages.

And then the increase in the run rate in the fourth quarter, is that an implication that better borrowers are now developing? Better transactions are out there? Or what are the implications?

I don't know that I would read anything into that from an implication standpoint. I think that's just kind of how the quarter worked out.

Then, finally, if we take the $0.48 reported in the fourth quarter and annualize that, that's $1.92 of earnings per year. With that in mind, would you share your thoughts relative to 2010, please?

We do not provide any earnings guidance, Bill.

I figured you didn't, but I thought you might from the commentary.

The comments we've made in the past though, I mean, the spreads are in pretty good shape. I mean, one of the risks to the spread is the fact that the reinvestment opportunities, these days, are not at the same rates as were available to us throughout 2009 when we went through a fair amount of calls. So the implications maybe are the portfolio might come down a little bit, but the there's two sides to the spread management.

There's a liability side as well, too. If that does materialize, we'll be paying attention to the liability side to keep our spreads up at desired levels. We make our earnings off of the spreads, so the sales volumes don't impact too much the particular quarterly earnings. They impact the long-term growth. I think we certainly feel that we're going to have another very good year in 2010 without giving you a specific prediction of an earnings number.

Thank you.

Thank you and we have a followup question from Randy Binner, FBR Capital Market.

Great. Thanks for taking the followup. I just wanted to clean up a couple of capital numbers if I could. Do you have an estimate or fine tune number of statutory capital at year-end, '09?

Just under $1.2 billion of statutory capital and surplus. $1,193 billion.

$1,193 billion, great. And then is there kind of a final quote you can give us of the percentage pickup from the NAIC change, the PIMCO change in percentage points on RBC ratio?

No.

Okay. Is there any way to quantify it otherwise?

Not off the top of my head, Randy, no. Obviously, it's a mathematical exercise that could be accomplished, but I don't have a number for you.

Fair enough. Jumping back to the income statement, the other expense line came in a bit better than we thought, at a little under $12 million. That's actually quite helpful to the overall model, so I just wanted to get a little bit of color on what caused that good result. Was it lower legal expenses? Does it include some of those infrastructure build-outs you referenced? How should I think about that line going forward?

I would tend to think that line is that there were some lower amounts in the fourth quarter, I mean, in particular, our insurance taxes were pretty flat from the third quarter to the fourth quarter, so we were at $3 billion through nine months and that's where the year ended up. In my estimation, that's somewhat of an aberration.

I also saw there was $160,000 of commissions that were deferrable that didn't get deferred in the third quarter, got deferred in the fourth. That's a fairly small amount but I kind of look at a number -- for the full year we were at $57 million, which would be a little more than $14 million a quarter. That might be a little bit on the high side because we have had higher legal expenses. Wendy commented that we think we're getting to a conclusion on the wells notice and that certainly has involved legal expense and some other things, so probably in the $13 million to $14 million range is a reasonable spot to think of where operating expenses should be in normal quarters.

That's perfect. One more, if I could, since this was a followup. Just when you're putting the new money to work, just in the corporates, I guess in particular, are those tending to be triple Bs? Could you clarify -- I'm sorry, John, you gave these numbers -- but it was $298 million went to agencies. I didn't quite get the corporate and muni numbers in absolutes, in millions of dollars. Just curious to grab those numbers and just kind of get a color of where in the letter grades in particular, the corporates are.

They go into single As, and triple Bs, the combination of both. I wouldn't know necessarily the blend of -- it might be skewed a little bit toward triple B in terms of a 50-50 split, a little bit higher to the triple B. There was $275 million in corporates and $63 million in the taxable munis. Those are double As, Jeff? Yes, taxable munis are at double A level.

Double As, perfect. Okay, that's all. Thanks so much.

Thank you. There are no other questions at this time. I would like to hand the conference to Julie LaFollette for closing remarks.

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

Thank you for your participation in today's conference. This concludes the presentation and you may now disconnect. Have a wonderful day.