American Equity Investment Life Holding Co (AEL) 2010 Q1 法說會逐字稿

Welcome to the American Equity Investment Life Holding Company's First Quarter 2010 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 American Equity Investment Life Holding Company's conference call to discuss first quarter 2010 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 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 Wendy Waugaman.

Good morning and welcome to the call for the first quarter of 2010. As we announced last night, we've had a very solid start to the year with first quarter operating earnings of $25.8 million, or $0.43 per diluted share. That's a 10% increase year-over-year. So, once again we are headed on a path of growth in earnings for 2010.

We also had improving sales at nearly $850 million, that's up 30% year-over-year. That's the best first quarter we've ever had since January and February tend to be lower production months. So, we are very pleased to see the growth trends and sales of 2009 continuing now into 2010.

Our operating earnings translate into a return of operating earnings on average equity of 14%. That remains high relative to peer group and relative to the life industry and so we are pleased to see those results continuing.

As we talk about some of the detail of the results, there are several big themes for the quarter I think to keep in mind. One is certainly the continuing strong sales. We had a record year in 2009, 60% increase, a lot of factors driving that and now the momentum continues on into 2010 and I think is a very good prospect for our future growth. Ron will be discussing the drivers of that as well as what we are seeing from some of our competitors.

Another one of the big impacts of this quarter was the continuing low cost of money that has driven higher spread results. That's a reflection of the fact that option costs remained very, very low and now in a somewhat lower volatility environment than we saw in 2008 and 2009, certainly option costs are as low as we've ever seen them. In addition to that we had positive net hedging results which Don will discuss, all of which resulted in I think all-time low in our cost of money.

One of the overarching themes for the quarter is the effects of the low interest rate environment we're operating in. Certainly that's good for sales since rates on competing products such as certificates of deposits are very low and make our products more competitive and more attractive in comparison.

On the other side, though, it makes it a much more challenging investment environment with yields coming down and calls particularly of agency securities accelerating. We have not and will not depart from our discipline of focusing on credit quality. And so, as we put money to work in this low rate environment, we are very conscious of maintaining our standards of credit quality as we look for the most competitive rates available in this environment.

It's also worth remembering that the great majority of our liabilities are annually adjustable. We can reprise our cost of money to adjust for differing yield environments to be able to manage to our spread targets. We can and do adjust rates as necessary when yields in the economy come down or go up, and rate adjustments are something that we are actively considering on an ongoing basis and John will discuss that as well.

Probably the best news of the quarter was our RBC ratio, which is estimated at 359% for the quarter compared to 337% at year-end. That reflects a very good quarter of statutory earnings at $65 million. It also reflects a charge that we had at year end that made the ratio somewhat lower than it would have otherwise been for securities not settled at the end of the quarter.

All in all, though, a very good RBC result and that factors into our thinking about capital adequacy in a very major way. Our conclusions about our capital at present would be, number one, that the growth in our invested assets which is 26% year-over-year, now generates enough statutory earnings to sustain a significantly higher level of new sales than ever before in the past. We are comfortable that we can write at $3 billion a year and above for at least the next couple of years without the need for additional outside capital.

We do have opportunities to continue to grow sales to new highs particularly as a result of our relationships with a growing number of very significant producers. Certainly it's our goal and our long-term strategy to continue to drive sales in invested assets to new highs.

So, as we think about our longer range future, we want to be opportunistic in thinking about and looking at our projected capital needs and capital raising opportunities.

And with that, I'll turn it over to John to discuss the results in detail.

Thank you, Wendy and good morning, everyone, and welcome to the call. Wendy commented about spread results being excellent for the quarter. The reported number was 3.17% and the principal driver behind that would have been the low cost of money. She commented we would have been at an all time low in terms of cost of money for any quarter in the company's history. The market volatility, the measure we typically look at there is the VIX and going back to last year sometime, the VIX has been around 20 or below. I know recently it's moved back up above 20, but in general volatility has been low and that translates into lower option costs and we've been writing that trend down in terms of our purchases.

In addition in this quarter and we haven't had these experiences for quite some time. Those of you who might be with us maybe eight, nine, ten quarters ago, we used to have to talk periodically about hedging results, but until the last two quarters that really wasn't relevant because of the low returns, but hedging results are back into the equation and we had a positive result this quarter.

In general, our approach to dealing with the index annuities is that we don't want to catch ourselves under hedged, so we try and err on the side of having adequate options to fund the index credits. And in periods where the market goes up and the index produces returns, that's going to generate some over hedging or positive results for us.

But the reasons we end up in those over hedged positions is we attempt to estimate what the policyholders are going to withdraw. They have to be here on their next contract anniversary to receive an index and they also have other options to reallocate their funds. So, as we say in general that process left us in an over hedged position and the positive market returns flow through to our cost of money. The hedging results would have added about 13 basis points to the cost of money, so excluding those we would have still been at 308 I believe, which is still a very low number.

On the other side of the spread equation is investment income. On an absolute basis, we were essentially flat from fourth quarter and up 10% from first quarter a year ago at $243 million. In terms of the rate, the rate for the quarter was 6.13%, which would be down from 6.30% a year ago. The rate was influenced by high level of liquidity in our portfolio during the quarter. We've had a significant number of agency bonds being called and for those who have looked at our published documents through the years, you know that the agency bonds that we purchase are all callable securities. They provide -- that call option provides the higher yields that we need to meet our yield objectives, but it does subject us to that call risk and with the decline in treasury rates and the agency rates following that, there has been an accelerated level of calls.

With that accelerated levels it's taken longer than usual to get the funds reinvested. We have gone back into some additional agency securities, but we also have been diversifying the portfolio into corporate securities, taxable, municipals and to achieve the proper diversification we have to buy those in smaller lots than what happens when the agencies get called. So the timing has just been such that we can't put the money back out as fast as the calls have been happening.

And that excess liquidity probably will cost us about $4.9 million in the quarter, which without that we would have had an investment yield of 6.25%. You kind of look at the reported spread of 3.17% and then pro forma for the excess liquidity assuming the rate we had on new purchases, and then pro forma the cost of money for the hedging result and you get on a pro forma basis to the same result we had on a reported basis. So plusses and minuses on either side, but still supporting that 3.17% spread for the quarter.

In terms of that excess liquidity, we are forward invested at the current point in time. So later this month those trades will settle and the excess liquidity will be out of the balance sheet, although the agency securities are still eligible for call and if additional calls come in that may alter that position.

In terms of new money purchases for the quarter, we invested $2.4 billion in fixed maturity securities. The yield we got on those was 5.86%. $1.7 billion of those investments were in agency securities at a 5.78% yield, $464 million were in investment grade corporates at a 6.15% yield, $174 million in taxable municipals and those would largely be in a AA type rating category at 5.96%, and then just under $70 million of prime residential mortgage-backed securities at a 5.82% yield. We also issued $45 million of commercial mortgages in the quarter at 6.76%.

As we've commented, the investment environment is lower yields these days and if necessary we would be prepared to lower rates further in order to protect spreads to the target levels that we have.

DAC, deferred sales inducements amortization in the quarter was pretty much in line with I think where our expectations were. It tracks the gross profits on the index annuity business and trends up as those profits increase.

Operating expenses was somewhat higher in the quarter at $16 million. We had a couple of items in there that we would view as non-recurring. I would also point to the fact that the fourth quarter '09 amounts if you are comparing to that number which was down at the $12 million range, had about $1 million benefit in it from certain non-recurring items that helped us in the fourth quarter.

In the first quarter of 2010, we have about $1.3 million of compensation type related expenses for option grants and an amendment to the retirement agreement we have with Dave Noble. We also had some expenses related to a settlement of an action in Minnesota. So that brought the expenses to an elevated level.

The normalized run rate for expenses is more likely in the $14 million range and we would anticipate moving back to that level in the next quarter.

Realized gains and losses, we had net gains of $9.9 million, which consists of $14.1 million gains on sales of securities and then $4.1 million of losses or impairments on two commercial loan properties, two hotels down in the Tennessee area. The gains on securities are largely resulting from tax planning strategies that we are employing. As you would know that we've had -- we've taken impairments on securities through the years. Some of those impairments were deemed what we call other than temporary, so accounting rules required write downs, but it wasn't necessarily our conclusion that the loss would actually be realized.

Some of the impairments would have been securities that the impairment is viewed to be permanent. A good example would be two issues of Fannie Mae and Freddie Mac preferred stocks. So, as we realized the tax losses by selling those securities that have been impaired, we need to generate capital gains because the tax code doesn't allow us to deduct capital losses against ordinary income.

In terms of our commercial loans, the portfolio remains in good shape and is of high quality. During the quarter, we took one additional property back into real estate, that was accomplished through a deed in lieu of transaction and that property had previously been written down, so there was no further loss on it.

We have 20 loans in a workout status. That's down from 23 at the end of the year. That workout status is principally situations where we temporarily permitted borrowers to go on in interest-only likely scenario there as for re-tenanting the property due to filled vacancies that have occurred from since the time the loan was made.

We recognize as I said $4.1 million in losses on two hotel properties. The principal balance on those was $9.5 million. That brings our total losses on commercial mortgages to $10.6 million, but still a relatively small amount compared to the size of the portfolio and we continue to have a high degree of confidence that the portfolio has been well underwritten. It has high quality collateral, acceptable borrowers and good coverage that's going to allow us to collect the outstanding principal.

In terms of security write downs, we had four residential mortgage-backed securities that we took some additional write downs of $3.2 million and those would reflect adjusting estimates of where the ultimate recoveries are going to be on those securities.

Our watch list of corporate securities is down from nine securities with $63 million of value down to five securities with $35 million. The unrealized loss is sitting at $7.2 million. So that list has come down substantially over the last several quarters as the credit crisis particularly in the corporate world has healed and we've seen some significant recoveries in values of securities that were previously on the watch list. We've also had several securities that have recovered in value to the point where we have been able to sell and recover our entire amortized cost.

Book value per share $13.99 including the accumulated other comprehensive income, $13.90 excluding that. And one comment -- Wendy made a few comments on capital net and one of the things that will be different going forward is we had reinsurance in 2009, in the first quarter of 2010 that was ceding away a portion of our business as a capital management tool. That reinsurance with respect to the index business has been suspended and so we are now retaining 100% of the index annuity sales.

We continue to reinsure to that reinsurer 80% of the multi-year rate guarantee product that we sell, which as you know from our conversations in the past, we prefer to focus on the annual adjustable business that fits the profile of the typical policyholder we've had through the years.

And with that, I'll let Ron share the good news about sales.

Thank you, John. Good morning, everyone. As Wendy reported, sales in the first quarter were nearly $850 million a record for first quarter sales and an increase of 30% compared to the first quarter of 2009. By the way the previous record for first quarter sales was back in 2005 at just over $700 million. So not only did we break the record in the first quarter but we broke it by a substantial margin.

Several factors that are leading to the great and strong sales growth that we have, and Wendy alluded to a couple of them already and they are rather obvious. The first one is interest rates obviously from competing safe money alternatives remained very low. People are still very concerned about the volatility in the stock market, while the bounce in the last several months may have enticed a few back in it appears that mostly they are still very concerned about the volatility and I think the last week is certainly good evidence of that that the market is plenty volatile.

Another factor is that we've been successful in keeping this good sales momentum going from our competing companies that pulled back their sales targets in 2009. We were certainly the benefactor of that and we worked very hard to earn and keep that business from those displaced agents. And if you remember from our last conference call, I spoke about our "Don't Go Back" campaign, where we continue to talk about that and the fact that we were there last year to accept their business, we took good care of them and their customers and we're still here. So, when the competition comes calling, our words to them are just say, "Don't Go Back" and this message does resonate with a lot of the people that we are talking with.

Speaking of the competition, most of our primary competitors have gotten back into the market although they really haven't gotten back in a predatory manner like they have in the past. There are a few exceptions, but most of our primary competitors have left in place the changes that they made to reduce their sales targets in 2009.

As we look at indicators of our sales growth, we look at our pending applications probably as the most thing that we focus on. To give you a little bit of history, in January, our average pending count was 2,708. In February, our average pending count was 2,940, and in March it was 3,343. And today, it's bouncing around 3,500. So I think those are all good. A nice trend, trending up from January to where we are today. January and February are historically a little bit low as agents get back to work after taking off the holidays and such. So, that is certainly moving in the right direction.

Another good indicator is our Gold Eagle agent count. These are producers who write at least $1 million in sales during the calendar year. In 2009, through the first quarter, we had 613 agents who had qualified or were on track to qualify. And when I say on track that would be producers who had given us at least $250,000 through March. By comparison, this year through March, we have 783 who have qualified or are on track to qualify.

We also had our fourth $1 million Producer Forum in March. This was a great success and our biggest program with over 600 attendees. And to attend this program, producers must have written at least $1 million in fixed annuities during 2009. It didn't need to be with us. It could be with other companies if they could prove their production with those other companies, and if they did they were eligible to attend. And of the attendees, 59% qualified to be there by writing business for American Equity, leaving the other 41% that had to prove that they wrote business someplace else. And this makes for a very good opportunity for us to bring additional producers into the American Equity fold.

We really believe this program is absolutely the right thing to do. We look back on our 2009 statistics for this Producer Forum and the results of 2009 program there were 197 agents that had to prove that they wrote $1 million someplace other than American Equity. And of those 197 agents, 107 wrote just over $100 million for us after the Producer Forum through 2009. And even more significantly, there were 38 of those 107 producers that all wrote over $1 million for us after the Producer Forum through 2009 to the tune of $77 million. So I think those are pretty staggering numbers and that's why we keep doing them every year.

We are certainly off to a good start in 2010 as we've been talking about. And I think in addition to the drivers that we visited about, I think we also need to include as part of our success the cornerstones at American Equity of relationship building an excellent service. We get out into the field and we make it happen. We have six regional marketing directors led by Kirby Wood and they are on the road all the time. And they are out there forging new relationships, maintaining existing relationships. And it's just not them, I travel a fair amount, Wendy travels, John travels, Dave Noble travels. And I think it's very unique that you'd find executives at that level traveling into the field, visiting with agents in marketing companies. We just don't run into it from our competitors. And the $1 million Producer Forum is just one example where we were all there and we're all showing the producers that we legitimately want to earn their business and be good partners with them.

Some other examples in 2009 that show we're out in the field and it may be normal in the variable annuity market where you have all of these people out traveling, but I assure you it is unique in the fixed side, because the producers tell us all the time, you're the first fixed company representative to be in our office. The variable guys are always lined up in the lobby, but you are the first fixed company, so that says a lot for us too.

But to give you some more examples, last year our field marketing team attended 180 different marketing company events. That includes sales symposiums and conventions. We had 368 marketing company office visits. We visited 538 Gold Eagle members. We visited over 2,000 agents in total. We had 18 Producer Forums in our home office, of which over 400 producers attended and that's just going to support the philosophy that American Equity has about relationship building. And obviously the excellent service internally is equally important. And it's not always the rocket science stuff, but it's also the little things when you add them up that make a big difference like answering the phones and issuing policies in 24 hours and getting supply orders filled in 24 hours and paying commissions accurately on time. But I find it amusing, but I also consider a compliment when I see some of our primary competitors offering $100 if the policy isn't issued in 24 to 36 hours. And quite frankly it doesn't do the producer any good if the insurance company had poor service and caused them to lose the sale and perhaps a $10,000 commission to go with it. So, American Equity is issuing policies everyday and we don't have to put any money up special for when we don't.

To that end, we are very gratified to have received some excellent rankings in April's edition of Agent's Sales Journal. There was a survey in which producers across America participated and ranked annuity companies in 10 different categories. And the categories ranged from best call center to effective marketing material to best line of fixed and best line of indexed annuities, and I am very pleased to say American Equity ranked first in seven out of the 10 categories. Now, one category that we didn't rank in was best line of variable annuity, so I guess that's a good thing that we didn't rank in that category. But we ranked first in seven out of 10 categories and then we ranked overall Best Meets Agents' Overall Needs in the Annuity Marketplace. So, we are very gratified to have very, very good rankings in that issue.

So, with that, I'll turn the call back over to Wendy.

Thank you, Ron. Updates on a couple of areas. 151A, and there is not a lot new to report there. We're still waiting on several different fronts. As you know, we have legislation pending in both the House and Senate, which would have the effect of repealing 151A. We continue to build co-sponsors for that legislation and we are now up to 86 in the House and 16 in the Senate. Our legislative initiative has been very intense over the last few weeks corresponding to the movement of the financial reg reform bill through Congress as that's one opportunity for us to get the 151A bill passed, and so a lot of effort has been put into that.

And in addition, the dialog with the SEC has gone on. We are aware that the NAIC had a meeting with the SEC within the last couple of weeks. Not a lot new emerged from that other than that the SEC indicated that they would be deciding on a course of action and deciding on their response to last summer's court ruling remanding the rule by the end of this month, which would be May.

Now, while that would be good news to have some indication as to what they are thinking, we fear that there may be some slippage in that deadline and that it may persist beyond May. In the meantime, we still are awaiting the court's ruling on the issue of whether the additional remedy of vacater will be granted and that has dragged on now for some time and there is really no good indication as to when the court might rule on that. So, very hopeful now for the legislation and hopeful that there will be a relatively near term resolution, but there is nothing specific that we can point to that would provide some type of a deadline that we could count on.

So in the meantime, we continue to both work to defeat 151A as well as prepare for it should it ultimately come to pass. As we talked about in the past, there is a long time to prepare for it. The SEC has consented to an additional two-year deferral after any issuance or re-issuance of the rule following their decision. That means that when you take into account all the procedural steps that need to happen before the re-issuance of the rule, it's very likely to be 2013 before 151A would ever become effective if it ever becomes effective.

As we've discussed in the past, we continue to take a number of steps to prepare for that so that we will be ready to sell registered products and to service those of our agents who decide not to sell registered products long before the deadline should come to pass.

We've talked about Eagle Life Insurance Company, which is our subsidiary through which to sell registered products and we continue to work on the licensing of that entity. We are now licensed in 34 states. We have our registration statement pending for our first registered product and once we get our first quarter financials for Eagle attached to that as an amendment, we would expect it to be declared effective very shortly after that. We are moving forward with the filing of that product in the various states and have a number of state approvals of the product and we continue to expect to begin some sales by the third quarter of 2010 and then ramp up over time.

On the litigation front, there is nothing very new in our two California cases. As we've discussed in the past, San Francisco or St. Louis Nabisco case, that's the same case. That's coming to trial in September of 2010. The discovery efforts are starting to accelerate now in anticipation of that trial date and so work continues towards being prepared for trial in September of 2010.

And with that, I will turn it back over to the operator for questions.

(Operator Instructions). And your first question comes from the line of Randy Binner from FBR Capital Markets. Please proceed.

Hi, thank you. Just some questions on capital. I guess Wendy there is I think a comment in your dialog on $3 billion and above of sales. Just to be curious up to what level of sales you think AEL can retain this business, the run rates from the first quarter would imply a $4 billion number would be achievable for the year. So just curious how much could be retained before reinsurance might kick back in?

Yes. We've done a quite a bit of modeling. We've looked at a lot of different production scenarios as well as interest rate scenarios that gives us an estimate of how much we think we can write. Our estimates would show that we can write between $3.5 billion and $4 billion this year and next and still maintain an RBC ratio above 300%. If we should start to see sales climbing in those future years above a $4 billion level, then that's what would cause us to think about additional capital.

Okay, that's very helpful. And then, just to clarify where some of the money is located, the $49 million approximately that was raised in December, is that still at the hold co and is that held independent of those calculations or would that be contributed into those calculations?

No, it's still at the holding company. It's not included in those calculations that -- our first priority for use of that money is to pay down the old convertible debt.

Okay. How much sales would $50 million support?

Well, if you use as a rough rule of thumb that it requires somewhere around 7% capital to support every dollar of new sales, then $50 billion is 7% of what $800 million -- $700 or $800 million. So that would be about the number.

Okay. And just one more, just on the multi-year guarantee, that reinsurance agreement that's still with the (inaudible) is that correct?

Yes, it is.

All right. I'll drop back in the queue. Thank you.

Your next question comes from the line of Mark Hughes from SunTrust. Please proceed.

Thank you very much. How do you think you are doing on sales relative to the market? Do you think you are capturing share, capturing much share?

I'd say that we are probably maintaining a good chunk of the share that we finished with at the end of last year. I think I don't -- we haven't seen a report come out yet in the first quarter, but we think we are getting about 12% of the indexed annuity share.

Got you. And then the -- you mentioned the ranking in the Agent's Sales Journal, is that something they do annually and did you rank higher this year than previously?

This is the first survey that has been done in Agent's Sales Journal, so I think it was just something that they decided to do and isn't a reoccurring survey.

Yes. And then the potential to have some sort of insert in the financial reform bill, how much -- I guess it's hard to handicap it, but is that a real possibility, it sounds like it?

I think it is a real possibility. We know that there is going to be literally hundreds of amendments to that bill and so it will be quite a process in the senate to get a vote on a final bill there. But certainly we've made an awful lot of contacts to an awful of senators and representatives and we are trying to be very strategic in how we think about getting our bill appended.

All right. And one more page, more or less.

Right.

Okay. Thank you very much.

Your next question comes from the line of Paul Sarran from Macquarie. Please proceed

Hi, good morning. Just on capital first. If you see an opportunity to refinance the converts rather than pay down with cash, is there any reason why you wouldn't prefer that option?

Issue new debt to refinance the old debt, is that what you're saying?

Yes. Rather than use that $50 million of the holding company.

It's a possibility. We are cognizant of leverage ratios, we are cognizant of the cost of capital, so all those things go into the mix as we think about it, but yes that's one alternative.

Yes, one bit of feedback that we add in December was that it would take a size of $100 million or more, which we did $116 million in December to kind of make -- you need an issue of that size to make it attractive to the market, so...

So there is some liquidity.

Yes, so there is some liquidity in the issue, so we are down to $81 million so that might be a negative to do on a refinancing.

Would you have the debt capacity to issue an extra $20 million to get over that $100 million hurdle?

Yes, we would. I mean, our adjusted leverage is sitting down at the 20-some percent, 27%. That's well below at least -- we haven't seen numbers from rating agencies in while, and that was well below where the last thresholds were, I have to believe that we're -- we still sit well below where we would need to be for our current ratings.

Okay.

And $20 million wouldn't move it hardly at all.

Right, okay. And then I just had one accounting related question. Is there any DAC amortization impact from the over-hedging gains?

Yes, there is. I mean that flows into profits from the business and each quarter we replace in our projection models the expected profits with the actual profits. So, we did have increased amortization from that aspect.

Do you have any sense of how much that was in this quarter?

Not specifically. No, Paul.

Okay.

We don't isolate the components. We had additional profits on that element of the projected profits. The surrender gains came in less than where the projection models were. Both adjustments get put in at the same time, so we don't isolate how much was attributable to any particular source.

Okay, all right. Thank you.

Your next question comes from the line of Bill Dordelman from Titan Capital Management. Please proceed.

Thank you. Do we understand correctly with the other operating costs being a couple of million higher this quarter than your regular run rate. If that right there is basically an automatic $0.02 benefit to earnings when we roll into the June quarter versus the March quarter?

I haven't calculated out after-tax or per share, Bill,but that sounds like the right number, yes.

Okay, thank you. And then the second question is, I think it was noted that discovery is accelerating in the legal cases and with that being the case sometimes that can get to be a bit more expensive. What's the cost impact to either earnings or earnings per share that you are anticipating from that?

You are right, Bill. That acceleration of discovery generally results in some higher legal bills. It's very difficult to forecast, however, exactly where those bills will come in and what some of the other factors going into other expenses will be for the next quarter. So, it would be very hard for me to try to give you a specific estimate as to what those expenses are likely to be next quarter.

All right, thank you.

Your next question comes from the line of Steven Schwartz from Raymond James. Please proceed.

Hi, good morning everybody.

Hi, Steve.

Hi, if I may, the question -- follow-up on SEC 151A and Wendy your statement about the SEC deciding to take course of action. So, I mean, is this indicating that the SEC hasn't even made up its mind yet whether it wants to undertake the ECCF analysis?

What they've said is that they are moving forward with doing the analysis but we haven't had any indication that it's complete or what conclusions they've drawn from the analysis, whether it supports or does not support moving forward with 151A. So, what they have said is that they are working on it but we don't know for sure what conclusions that they are going to draw from that.

Okay. So do they plan on having -- they are claiming on having this thing done by the end of next month?

That's what they've said although I hear a lot of skepticism expressed about that from different sources.

Okay. Fair enough. And then, Ron, if I may, tie-in something that John said. John indicated that given where new money rates are to protect target spread, you would be prepared to lower your, I guess, crediting rates, participation rates and what have you. Where are you vis--vis the competition? Do you have room to do that and still stay very competitive, have others done that already? Where is that all going?

I think that our rates are probably a notch above many of our competitors. We typically don't change new money rates so much so we kind of ride out the highs and the lows where I think most of our competitors are perhaps a little bit -- have more kneejerk reactions and so if we did have to make adjustments I think we'd still be just fine and competitive with everybody else.

Okay, great. Thank you.

And you have a follow-up question coming from the line of Randy Binner from FBR Capital Markets. Please proceed.

Hi, thanks. Just a follow-up on the other question from the previous caller on the potential legal expense and I was wondering -- assuming SEC goes forward with this and there is further litigation, is that a cost that would be contemplated in the $14 million of other expenses?

Well, I think the short answer is no, it may not be. But the thing to keep in mind about the SEC litigation is number one, if that should happen it's off in the future a ways. They would need to publish the analysis, first of all, have their notice and comment period and then reissue the rule. So, the opportunity to litigate over the sufficiency of that analysis wouldn't even arise until next year, I would guess. And when it does, as you know, we have a coalition of companies that have joined together to fight this and to share the cost and so those costs have been split among six or seven different companies and that makes that aspect of it much more manageable.

Okay, great. And then, if you could share, when the NAIC meets with the SEC, do you know what the subject of their conversation is? Is it around suitability standards, is it -- I would just be interested in color on kind of what the dialogue is there?

Sure. Well, it's my understanding of the meeting that happened last month that the NAIC wanted to discuss with the SEC the fact that they continued to enhance standards in sales practices, in annuities, and in particularly that a New Model Suitability Law has been passed by the NAIC and is expected to be rolled out in to the states. That Model Suitability Law is comparable in many ways to FINRA's Suitability Model for Variable Annuities. And so, I believe the message that the NAIC wants to send is that the two bodies of regulation have been harmonized and that it's much more efficient to leave regulation of fixed annuity products including index annuities with the states.

Got it. Thank you very much.

Your next question comes from the line of Greg Eisen from American Equity. Please proceed.

Thanks, good morning. Turning to your agency bonds, if I could, you talked about the calls that you had called away from you this quarter. Could you share with us how much premium you amortized to expense in the quarter as a direct result of those calls?

None. The agency bonds are all bought at par at -- they are typically a direct issue from the agency. There is brokerage firm in the middle but it's -- what we've bought through the years has been directly issued by the agency at par to us.

So you have not been buying them in the secondary market the net premiums to par.

That's correct.

Although Fannie Mae is going to be calling more bonds this quarter, you then, therefore, don't really have an exposure to that expense in the second quarter also?

Well our exposure is they call them in at par, so we have no gain or loss and then we have to deal with the reinvestment. And if we want to stay in agency bonds, obviously the reinvestment would be at lower rate. To the extent that we want to maintain rates and diversify, I mean, that's where the slowdown and reinvestment comes in because they call $100 million position today and if we want to put that into $10 million corporate positions we've got to be able to find those and then do the work to establish the credit worthiness of what we want to buy. And likewise, if we just wanted to go back into another $100 million agency bond, we have to enter into arrangements with the agency for the issuance of a new bond and typically once you strike the terms, you've got several weeks before settlement occurs. So, that would create -- any kind of call like that, even going back into agency bonds creates a period of time where we would have cash as opposed to permanent investments.

Understood. Okay, thank you.

You have a follow-up question coming from the line of Steven Schwartz from Raymond James. Please proceed.

Hi there, again. Just one more -- you have a credit line which is coming due in the reasonably foreseeable future. I was just wondering if you have been doing anything with regards to that?

Sure, we are giving that lots of thought. That matures in the fourth quarter of 2011 but we would like to have our game plan in place by the end of this year to address that and we are looking at a variety of alternatives to address that and haven't reached any final conclusions yet on the refinance of it. I think the one conclusion we have reached is that it doesn't make sense to issue common stock below par to refinance that facility. So, we would be looking at debt alternatives.

Okay. Thank you very much Wendy.

Ladies and gentlemen, this concludes the question and answer session. I will now hand the call back to Ms. Julie LaFollette 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.

Ladies and gentlemen that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.