American Equity Investment Life Holding Co (AEL) 2010 Q2 法說會逐字稿

Welcome to American Equity Investment Life Holding Company's second 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 second-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. As we announced last night, we had an excellent quarter in the second quarter of 2010, starting with record operating earnings at $29.2 million or $0.48 per diluted share. That's a 35% increase year over year so, obviously, we're very pleased with the earnings results. That represents a return on equity of 14.2%.

As Ron will be discussing, sales are holding very strong this year at an average of over $300 million a month with a total of $1.9 billion for the first six months, which puts us ahead of the same period last year, which as you all know was a record year for us.

We also experienced record investment spread during the quarter at 3.23%. John will get into the details of that, but we're very proud of the spreads in light of the downward pressure on yields we're experiencing in new money investments and the very low rate environment.

Our book value, including the other comprehensive income, is now up to $15.85, and we finished the quarter with an increase in our RBC ratio at 375% of company action level. That's up from March 31 and up from year-end when it was at 334%. That reflects very strong statutory earnings during the year at, so far, $150.4 million for the first six months of this year compared to $25.2 million for the first six months of last year.

Before we get into the financial details, I'd like to spend some time talking about 151A and our success on that front, since that was perhaps the biggest news of the quarter. As you know, the Dodd-Frank Wall Street Reform and Consumer Protection Act was passed during the month of July. Within it are provisions limiting the SEC's power to regulate annuities. Those provisions were based initially on the original bills that were submitted in the House and Senate last summer and were the topic of a very intense lobbying effort by American Equity and others in the industry over the course of the last year.

The bill, as enacted, contains three prongs for remaining exempt as a fixed annuity product from securities regulation. As a matter of historical interest, you know that the Securities Act has always exempted life insurance and annuity products, but which types of annuities are within that exemption had become the topic of a debate.

Now, Dodd-Frank clarifies that by establishing three requirements for fixed annuity products to remain outside the SEC's jurisdiction. Those include, number one, that the products can't be separate account products. Or, in other words, they can't be variable annuities. They must have minimum guarantees of principal and interest at levels required by state standard non-forfeiture laws, which has always been true of American Equity's indexed products. Last but not least, they need to be issued by a company that has a nationwide suitability program, which meets or exceeds the most current NAIC modeled law.

As we discussed on prior calls, there was a new model adopted by the NAIC earlier this year. That brings the NAIC requirements into conformity with FINRA Rule 2821, which covers variable annuities. The harmonization of insurance regulation and securities regulation was an important topic within the NAIC, and they were successful in getting the new model passed.

The biggest changes in that model are a requirement for a secondary review at the insurance carrier's level of each and every sale as well as heightened training requirements for insurance agents. Those are things that American Equity has had in place for some time, and so we are already in substantial compliance with the requirements of the Dodd-Frank Act.

Interestingly, as Congress was going through the deliberations and the votes on the Dodd-Frank Act, and of course, we were watching that closely with great interest and very pleased with the outcome of the House and Senate votes and awaiting the President's signature on the bill. In the midst of all of that, the DC circuit, the Court of Appeals for the DC circuit, acted and entered an order vacating Rule 151A.

That was a decision we had been waiting on for some time, and the fact it came in the midst of the success on the legislative front was a little ironic. It was a great victory to have the vacate order, but now that's overshadowed somewhat by the success on the legislative front, which really provides the broader relief.

The bill within the Dodd-Frank Act was known as the Harkin Amendment, based upon the advocacy of Senator Harkin of Iowa to include these provisions that would protect fixed annuities and, in particular, indexed annuities.

And as I mentioned, it reflects an intense lobbying effort by a number of insurance company and literally thousands of insurance producers around the country, and that lobbying really focused on education about the products and the protections offered by the products, about sales practices and the fact that insurance agents are trained and knowledgeable and the vast majority of sales happen in the correct way, and certainly education what state insurance regulators do.

No group worked harder than we did here at American Equity to bring this result about. We're extraordinarily proud of this effort and very proud of our staff who were involved in this.

In addition, it's notable that the NAIC and its leadership, including Commissioner Voss of Iowa, were truly outstanding in their -- in this response to their -- this attack on their jurisdiction. So, now with the defeat of 151A, we're pleased that we can back to the business of selling sleep insurance without this cloud hanging over our future.

As I mentioned, sales in our traditional channel remain very robust and we hope will now get even stronger with this uncertainty removed. We are continuing work on Eagle Life Insurance Company, which is the new life insurance subsidiary we formed to sell registered indexed products, and those sales would happen through a new channel for us, the Broker-Dealer and Registered Investment Advisor channel.

We continue to think that significant opportunities exist in this market, and we're pleased now that our strategy with Eagle is more of a growth strategy than a survival strategy since 151A is off the table. As we move forward with that strategy, we're extremely sensitive to not disrupting or causing conflict with our existing channel, which remained so strong. That's the independent insurance agent.

Ironically, the SEC declared our registration statement effective for our first registered products in the flurry of activity on 151A, so we now have an effective registration statement and are able to sell our first registered product. We continue to work with various groups to build out that distribution channel.

So with that, I'll turn it over to John to speak to the details of the financial results.

Thank you, Wendy, and good morning, everyone. Thanks, for joining us. As Wendy commented, the operating earnings were a record for the quarter and they were driven by spread, which, as we've said in many times in the past, is the most significant element of where our earnings come from. Aggregate spread in the quarter was 3.23%. That's up from 2.97% a year ago and 3.17% in the first quarter of this year [in a measure].

We continue to see declines in the cost of money. There was a little blip in the second quarter, back to about the time we announced first quarter earnings when the market volatility spiked and option costs rose a little bit for a period of time. But volatility is back down now, and through that period we've continued to see very acceptable costs as we purchase options for the upcoming year and renew business and issue new fixed business.

We did have, as we had in the first quarter, a benefit from over-hedging that's helping the cost of money. That largely stems, as we've said, from the past -- in the past of policyholder activity where the policyholders have withdrawn funds from their account subsequent to the point in time that an option has been purchased.

Our philosophy is to always to attempt to be over-hedged as opposed to be short options, and so that contributed about $4.9 million, so it reduced the cost of money. That would equate to about 11 basis points. As I move forward a little bit, I'll give you some information on how that helps in a normalized spread because there was an offsetting item on the investment income side.

Net investment income for the quarter was $255 million. That's up 12% year over year. That offsetting item I just referred to was the fact that, as in the first quarter, we've continued to have some excess cash balances that are largely arising from calls of government agency securities in our portfolio and the timing that that money is held in cash before it can be reinvested into either further back into agencies or into other investments.

So, the excess liquidity probably -- well, it was about $261 million in the second quarter compared to $334 million in the first quarter. That would have impacted the yield on the assets by about 10 basis points, so they -- the normalized spread would have been 3.22% looking at a normalized yield of 6.24% and a normalized cost of money at 3.02%.

Investment server, during the quarter we had about $1.2 billion of agency bonds and other sales of securities. The retired securities had an average yield of 6.02%, new investments $1.4 billion of fixed income securities at about a 5.83% yield, and we issued $92 million of new commercial mortgages with an average yield of 6.7%.

The foregone investment income that translates into the 6.24% normalized yield would have been about $3.4 -- $3.8 million, so net/net about $1 million of benefit from non-recurring or unusual items relative to investment income and cost of money.

In response to the low-rate environment, we have taken action to reduce rates effective July 20th. So just a couple of weeks ago, we reduced the fixed rates and the caps on our index annuities by about the equivalent of 40 basis points. The fixed rate would be 40 basis points, the expected reduction in the option costs, 40 basis points. We're still competitive on rates, and you'll hear from Ron Grensteiner in a few minutes about the competitive environment and how we fit. No adjustments to renewal rates on in-force business at this time, because the aggregate yield on the portfolio continues to support the rates that we have there.

DAC and DAC -- its deferred sales inducement amortization -- increased slightly in the quarter. That would correspond to the fact that the profits from the business, the spread income is greater.

We did not have an unlocking, although we've had a fair amount of questions about an upcoming change in accounting that's on the drawing board from the EITF that I know I've talked to several people about over the last 30 to 60 days. It concerns a change in the rules to the amount of cost that you can defer into deferred acquisition costs. It affects only the amounts that we look at as what we call internal costs. It does not affect commissions.

If you were to look at our 10-K in the footnotes, footnote six, you would see a -- the details of our deferred costs. In 2009, we had $306 million of total costs deferred of which $298 million were commissions and $8 million were the per-policy-type costs or internal costs that would be the subject of this new rule.

So, unlike a number of the other companies where I've been seeing their reports that have more of, say, a captive agency system, whereas American Equity is dependent or uses independent agents, which are commission-based, we don't have nearly the exposure to this change in the rule that others would have.

We have done a preliminary look and think that perhaps 60% to 75% of the per-policy costs might be subject to the new rule or would -- our costs would be reduced by that. That would probably translate into a $0.01 or $0.02 per share on earnings, although there is the possibility in adopting the rule, the EITF has mandated prospective adoption, but they've said retrospective adoption could be allowed. We've -- it's still a ways off to make a determination to which we would follow, but under retrospective adoption we would go back and restate a number of years. That would reduce current book value but minimize the impact on future earnings.

The effective date of this proposed change, as initially proposed, was to be the first of January of 2011. We're now understanding from a meeting that the accounting bodies had late last week that the change may not be effective to [2002] (sic). So, we may have had lots of conversation about something that's 18 months off as opposed to six months off.

Expenses for the quarter were slightly higher than what we would consider a normal run rate. We have seen some increase in legal expense. I think, later on, Wendy's going to talk about the lawsuits. But one of the California lawsuits is scheduled and is heading to trial, scheduled for later this year, so the activity in that suit is picking up in terms of depositions and other activities.

Realized gains and losses for the quarter were rather minimal. We did, for the first time, establish a general loan loss reserve for our commercial mortgages. We've now been through 12 to 15 months of having some experience with slightly higher than normal delinquencies. We've had a few foreclosures, and have made a determination that a general loan loss allowance is appropriate at this point in time. That reserve is primarily based upon about $80 million of loans that are either in a delinquent or workout status, and we've been publishing that type of information in our 10-Qs and 10-Ks for a while now, and that inventory of loans really has not changed that much over the last several quarters.

In terms of the commercial loans, we have -- through the -- since inception, we've had taken back six properties into REO for $16 million. We have 23 loans in workout for $62 million, and the delinquent loans are about 9 for $28 million. There are no loans in foreclosure at the moment.

We had a small amount of other-than-temporary impairment in the quarter on RMBS, $800,000. The watch list for securities remains very small. Four names on the list for $21 million at the end of June. That represents a $4.3 million unrealized loss. We did have one security that was on the first-quarter watch list that was sold in the second quarter, so that's really the only change there on the watch list.

With that, I'll turn the call over to Ron to talk about production and the competitive environment.

Thank you, John. Good morning, everyone. Production in the second quarter was $1.046 billion, a very strong quarter for us. It was down a bit from the second quarter of 2009.

But if you'll recall, in 2009 our second quarter was extraordinary as we had some sales contests winding down and we just announced our new commission structure program at that time. Plus, this is when several of our competitors were starting to scale back their sales targets and we, of course, were certainly the benefactor of that.

If we look though at the first six months of 2010, to 2009, we are up in production by 5%. Through June, we were at $1.893 billion compared to $1.797 billion in the first six months of 2009.

The sales climate for fixed annuities remains very strong as other safe-money alternative interest rates remain low, and the market continues to be very unpredictable.

In visiting with some of our annuity advisors, they say while the sales climate is good, buyers are maybe a little more skeptical today and that it probably takes more than one or two appointments for the customer to make a buying decision. But nonetheless, I think it's universal that this is certainly an excellent time to be in the sleep insurance business.

We remain optimistic about the future. We feel 2010 is a more stable and has healthier sales trends than we had in 2009. For example, in 2009 sales peaked in June and kind of trailed off the remainder of the months during the year, whereas in 2010 we haven't experienced those huge fluctuations in sales from month of month. As a matter of fact, our July production this year was greater than our July production of 2009.

One of the reasons for a strong July is what John was referring to with our interest rate adjustment on new money. That type of rate adjustment generally will cause some higher activity as producers get their business in to meet the rate change deadlines.

Pending, of course, is a good indicator of sales activity. Just as a reference point, in the first quarter of this year pending averaged 2,997 applications, and the second quarter we averaged 3,523. In July, we averaged 3,841, and as of today we're at 4,006 pending applications. So, that is certainly a good-looking trend.

So far, as far as Gold Eagle members go this year, we have 841 producers who are on track or who already have qualified as a Gold Eagle member. Last year, we had 892 for the year. While we might be a little bit behind last year's pace, membership count tends to accelerate in the second half of the year. If you'll recall, the Gold Eagle members, those are our best producers. Those are the ones that -- who will send American Equity at least $1 million in sales during the calendar year.

From a competitive standpoint, our regular competitors are in the game. Some are a little bit more aggressive than others, but that's certainly normal. I don't see any indication that American Equity would be losing overall market share. Even after the interest rate adjustment that we've been talking about, our rates are still very, very competitive.

Of course, I think in the competitive game of things our ace in the hole is always our service. American Equity service levels are just continuing to be outstanding. We continue to win over and maintain producers because of the great effort of our home office team. I am so proud of all of them. They do such a great job, and they do an awesome job of making all of us look good.

If you'll recall, in the last conference call we reported that there was a report card, an agent sales journal, where American Equity ranks number one in seven out of ten categories and number one in overall meeting producers' needs in the fixed annuity market. So that's just, again, a testament to the great staff that we've got here.

Also from a competitive and also from a general climate standpoint, our victory against 151A will certainly be positive for us. We felt that producers and marketing companies were somewhat paralyzed due to 151A and the uncertainty of the fixed indexed annuity business. They were asking questions like, "Do I need to get a securities license now," or, "What license do I need to get," or, "Should I switch gears completely and focus on life insurance and long-term care?" But thankfully, as Wendy reported, all that cloud has been lifted.

Additionally, we've had several producers and marketing companies tell us that they will be shifting more business to American Equity because of the leading role that we took in fighting 151A, both on the legislative and on the legal front.

I want to switch gears for just a minute and talk about something that we haven't talked about before, and those are some new events that we started last quarter. We started doing policyholder appreciation luncheons.

We know that people are concerned about their money. It's a fact that American Equity is not as visible as many other companies. We don't have any of those Super Bowl commercials or golf tournaments or blimps or anything like that, so we felt it was very appropriate at times like this to get out and visit with our policyholders face to face with some very specific goals in mind.

Number one and most important, we wanted to get out there and see them face to face and say, "Thank you. Thank you for entrusting us with their money." Number two, we certainly wanted to give them some assurance that American Equity is rock-solid financially. Number three, we wanted to reinforce the benefits of fixed annuities like tax deferrals and premium preservation and lifetime income, those types of things. Number four, we really wanted to have the opportunity to make a personal connection with them. We're not just a corporation. We're people too who think about our money, and we want to do our very best job possible of protecting theirs.

The format's real simple. We talk about the company. We talk high-level financial stuff, not the kind of stuff that would make their eyes roll back in their head but just the basics. We talk about the annuity basics, as I mentioned, Annuities 101. We feed them some lunch. We give them away some nice door prizes, and then they go home. The program takes about two hours total.

The message at these luncheons is delivered by none other than Mr. Noble, Wendy and myself, plus we have a whole host of other folks that are in attendance to make our guests feel welcome.

So far, we've been in Chicago, St. Louis, Kalamazoo, Pittsburgh and Philadelphia, and every single time, every outcome, the people come up to us and shake our hands and tell us how glad they are that we came, thanked us for lunch. We hear it constantly that they feel better about us. They feel better about their annuity. It's just absolutely amazing.

We feel very, very strongly that if we do these the right way, and when I say the right way, I mean with a sincere heart and to say thank you, that there will be benefits for everyone. The policyholder will feel better about us and the fact that we're watching their money.

It strengthens the relationship with the annuity advisor and the policyholder and, of course, with us. Hopefully, the company will have better persistency. The agent could get referrals. The agents may get some add-on business. We've heard several reports where the policyholder contacts the annuity advisor after our event for another appointment, and we've heard times when additional money is added to their annuity.

Frankly, I think the biggest benefit is probably for us that attend these, to see these policyholders face to face and see them walking through the door. Some of them are dressed like they're getting ready to go to church, and others are -- have their walkers or wheelchairs. But it does our spirit very, very good to see them and to realize that truly are -- that they truly are depending on us to run an efficient and effective insurance company, and that they're -- and that we're watching their money. It -- we -- I guess we come back from these events all the time more committed than ever to do the best job possible.

Next week, we're going to be in Detroit. We have over 200 registered for that. Then, we're going to be in -- also in Milwaukee, and we've got over 300 registered at the Milwaukee event.

In the end, I doubt that any of our competitors will try to follow us. If they do, I doubt that the founder, the CEO and the President of the insurance company will be in attendance and delivering the message. So, we've been very pleased with the outcomes of these, and we'll continue to do them throughout the balance of the year.

So with that, that concludes my report, and I'll turn it back to Wendy.

Thank you very much, Ron. A couple of concluding comments, first of all concerning capital adequacy, as I mentioned, our RBC ratio is very strong at 375% at June 30. As a result of that, we've taken a hard look at our [at-the-money] offering and whether the reasons that we established that a year ago still exist, and we've concluded that they do not. Last year in August when we announced that program, which would have authorized the issue up to 50 million shares at current market prices as we would select, we had some question marks around our capital adequacy. There were issues concerning our RMBS securities that were resolved at the end of the year.

So as we look at our capital today, we're in a very strong position and feel that the need to have the extra flexibility offered by the ATM program no longer exists. Of course, there's some expense to keeping it outstanding so, for all those reasons, we've decided to withdraw that program.

We are continuing to explore alternatives to refinance our line of credit and the remaining portion of our convertible debt that comes due in the fourth quarter of 2011. So, we expect to continue to analyze that and look to completing some type of refinance transaction before the end of the year.

As John mentioned, there's been some activity on the discovery front in our California lawsuits. I believe we discussed in the last call that a trial had been set for September in the lawsuit that's pending in the northern part of California, which includes a class of California policyholders.

That trial date has been moved back now to November, and so we've had some slippage in the schedule there. Discovery is ongoing and is resulting in some additional expense, as John mentioned.

There continues to be really a lull in the activity and nothing to report on the lawsuit that's pending in the southern part of California, in L.A., and there there's been no certification of the purported class of policyholders that the plaintiffs would like to represent.

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

Thank you for that presentation. (Operator Instructions). And please stand by for your first question.

Your first question comes from the line of Randy Binner of FBR Capital Markets. Please, proceed.

Thank you. I guess -- I guess I'd like to focus on capital, if I could. Wendy, you just mentioned that it seems like the line of credit would be a refinance, which is consistent with what we've thought, and then the converts will be retired. But with the RBC at 375%, you're running maybe excess capital at over 300% of maybe $270 million approximately.

So I guess my question is, how much -- if earnings continue to have capital build like this throughout the year and the company still targets approximately $4 billion of annual sales, or at least that's my target, how much of that capital do you really need to support sales? And assuming you don't need a material amount to retire the converts, what might you do with excess capital over that 300% level?

Sure. Well, you know, historically we've had a minimum target for our RBC level and for our rating of 300%. So, at 375% we are significantly above that.

One of our goals is to get a ratings upgrade, and so maintaining a level of capital that's been higher than our target in the past may help us in that, and we think may help the overall market valuation of the company. So that's one consideration that might lead us to manage to higher capital levels than we have in the past.

But you're right. If we stick to the same minimum target of 300% and we continue to see the excess build, we do still have a repurchase authority that is outstanding that our board put into place a couple of years ago now. So, we've got the ability to step in and repurchase some of that excess if it makes sense.

I really don't see us making a decision like that or repurchasing our common equity at any time before the end of this year, but it is a possibility for the future if we would continue to see excess capital continue to build.

Okay. So a couple of follow-ups there, first of all, John, I don't know if there's been an update since the last call, I don't think there has been, the [MiEF] adjustment has adjusted again or the proposal has changed again. Is there -- do you have an update of how much that might change the RBC ratio if we applied it to today's 375%?

Randy, I'm a little out of touch at the moment on what's going with the MiEF. I know there was a consideration of some modifications of the mortgage loans and that the -- and perhaps the scale, but I can't tell you any more than that. I --

Well --.

Our MiEF last year was at -- we were at 100%, so we weren't --.

Yes.

Getting any advantage on the low side, and I would anticipate that we would likely come in some place around that same level again this year.

Yes, fair enough. I mean, I think the base rate was going up to 400 basis points, but now it's back to 260, so if you're at 100% on adjustment, then it should be roughly equal.

Then one other follow-up is, Wendy, do you have an idea of what kind of RBC ratio you would target to get that next bump up? I assume it's the A.M. Best rate and you would like to go to single A.

Yes. Certainly, we would -- we'd like to see the S&P rating improved --.

Okay.

Also up from its BBB+ level to some category of an A rating, and we've never received any kind of specific direction from the rating agencies as to what level of capital we should target in order to get to the next ratings category. I -- in our minds if we were to target 350% as the capital level, that would be sufficient from our standpoint, but we need to have discussions with the rating agencies to see if that's consistent with their opinions.

Very good, thank you.

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

Hey, good morning. One I guess kind of general question maybe for Ron or Wendy. Ron, you commented on reactions among producers to the defeat of 151A. I was just wondering if you could comment on any changes in behavior among competitors that you may have seen?

What I'm thinking about specifically is were there any peer companies that maybe pulled back from the index annuity market or actively avoided it because of the regulatory uncertainty that might be coming back or becoming more aggressive now that there's more clarity around the regulatory status of the product?

I guess from my standpoint, Paul, I haven't seen any changes pro -- or before 151A and now opposed to 151A as far as what the competition has made changes because of that. I think there were companies that certainly had their back-up plans, like we did, but I don't think anybody made any intentional efforts to get out of fixed indexed annuities, and I haven't seen anybody, now that 151A is defeated, get more aggressive.

Okay. Then one for John, I think, the crediting rates after the July change, is it -- am I correct in that there -- it's targeting 250 to 270 basis points on the fixed strategy and a similar target -- similar option budget for index strategies? Is that right?

That's correct.

So, comparing that to the new money yield in the quarter of around 580, does that suggest that spreads on new sales are targeted in the 310 to 330-basis-point range? Is that a reasonable way to think about it?

Spreads on new sales are targeted at 290 to 310.

So, you're assuming a slightly lower new money yield?

Yes. I mean, we're -- I think our assumption on new money was that we could put out new money at about 540.

Okay.

That 580 rate was a -- was throughout the quarter, not just at the end of the quarter, so -- and we don't want to be too aggressive in setting that target.

So, our analysis for what rate we could achieve would have been new investments at 540, in rough numbers about -- we've -- or, the existing assets fund about one-third of the rate for new money because the outflows of money are, say, $1 for every $3 coming in.

So, we fund the outflows out of new premium. That frees up the assets in the portfolio to be available to support new money. So, our analysis of the current time is the yield available to us for new sales, or for new rates, would come one-third from the existing portfolio, two-thirds from new money at a 540 yield.

Okay. So, the weighted average yield for new business is a little bit higher because you're factoring in the current portfolio yield?

Yes.

All right. And then the 290 to 310, that's higher than what you'd typically targeted in the past. Is that mainly due to product changes?

No. The 290 to 310 has been our target for a while now. Our -- when we've talked of targets in the past we talked in terms of about 275 as the base product and then another 10 to 15 basis points for the lifetime income benefit rider.

The upper end of the range for the 310 is a -- it's a product that was first introduced February of 2009 that has a 10% premium bonus, which is comparable to the best-selling product we had prior to that. But it has a shorter surrender term than this other product, so the spread requirement was about 20 basis points higher. So, that's where the 310 is coming from, a 295 target on that product with 15 basis points for a lifetime income benefit rider.

Okay. So then, just kind of putting that altogether, the spreads of the quarter around 325, it's still essentially 15 basis points above what you target on new business and a little bit higher than maybe what you'd target for the portfolio as a whole, given there's some older business with lower spread targets. Does that sound about right?

Yes. Spreads are -- spreads in the quarter were certainly higher than targets, and that 275's been around for several years now. I can't remember exactly how far back. So, I wouldn't say we have a lot of business at targets less than that.

Okay. I think I'll leave it at that. Thanks.

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

Thank you very much. In terms of new sales, you say July was up year over year. Was July a big month in this quarter last year? Then, are there any -- any things in -- or, anything in August and September that makes it a tougher or easier comp as we look at the total 3Q sales?

Last July, the production in 2009 was, I want to say about $330, somewhere in there, million. It's kind of steadily declined in 2009 from there. This year, as I just look at the trends and know that we had a better July this year than last year, I think that we'll do better than the following -- in the following months than we did last year.

Right, got you, thank you. Then the pace of government agency calls, you got some headwind because of that. Is that continuing into July? Do you expect any change there?

The -- July was not a very big month for calls, but there are a fair amount of securities that become callable in the month of August. The anticipation is, at the current rate environment, that those would be called.

Okay, thank you.

Your next question comes from the line of Steven Schwartz of Raymond James & Associates.

Hey, everybody. Good morning.

Good morning, Steven.

Good morning. Hey, a question for you, John, and I don't know if [Jeff] is around, maybe he wants to touch on this too if he was around. But, the -- basically I think, if I got your numbers right, you're talking about $90 million of troubled commercial real estate loans, both in delinquency and then had been restructured. The loan loss allowance that you put up was $1.1 million. I was kind of wondering how you came up with that number and why you think that number is reasonable.

The -- Jeff, I'll be happy to do this. The number was based upon the experience we've had for the past four or five -- four or five quarters, I'm not sure which, Steven, of the loans that we've foreclosed and taken into real estate owned and the experience we've had on those versus the pool of loans that was in a sub-standard status at each quarter-end for the last four or five quarters.

Okay. Then, kind of a little bit off the wall, but it occurred to me maybe Ron can touch on this. What -- or maybe Wendy, what happens to Federal 0550 and maybe some of those agents that you lost because of that and given that SEC 151A was repealed and it's clear that indexed annuities are insured?

Yes. That's a very good question, because the whole premise of 0550 was that the issue was unsettled as to whether the products were insurance products or securities.

We've had some discussion among the coalition about now a FINRA strategy to address that issue. We think it's appropriate that FINRA withdraw 0550 since that basic premise is no longer there.

I do believe that the NAIC plans to reach out to the -- to FINRA to address this issue, and probably their influence will be more significant than ours in trying to get that mission accomplished.

I do know that [BDs] continue to have higher and more burdensome standards now within their operations for sales of indexed products. Some of those are continuing to impose those additional burdens even after 151A now has been defeated. So the strategy to approach FINRA, whether it comes from industry or from the regulators, will be an important one.

Ladies and gentlemen, this concludes our question-and-answer session. I would now like to turn the call back to Miss LaFollette for closing remarks.

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