American Equity Investment Life Holding Co (AEL) 2010 Q4 法說會逐字稿

Welcome to American Equity Investment Life Holding Company's Fourth Quarter of 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 fourth 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. And audio replay will be available on our website shortly after today's call. It is now my pleasure to introduce Wendy Waugaman.

Thank you, Julie, and good morning. We are very pleased to announce the most recent results. I would note at the outset that 2010 and, in particular, the fourth quarter completed two years of some of the most dynamic growth in American Equity's history with sales growth of 27% for the year and 73% for the fourth quarter. Those numbers are year-over-year before coinsurance.

Spread management produced a consistent 3.15% growth investment spread for the year, which we believe validates our fundamental strategy of growing invested assets through sales and retention, disciplined spread management and our emphasis continued on asset quality.

As a result, our invested assets grew 56% over the last two years from $12.7 billion at the start of 2009 to just under $20 billion at $19.8 billion at the end of 2010. What this means, as you look at American Equity is that it's a fundamentally different company today than it was two years ago in terms of our financial strength including our ability to support future growth at higher levels than ever before through internally generated earnings.

As we look to 2011, we continue to believe that the opportunities for future growth in the index annuity arena remain very significant for a variety of reasons. While equity market improvement over the last two years has restored some of the lost popularity of variable products, we believe that attitudes about risk have fundamentally changed.

Retirees, including a whole generation of baby boomers reaching retirement age do not have the luxury of time for market recovery and need the protections from market volatility that insurance products like index annuities offer.

Further, the burden of increasing personal taxes enhances the attractiveness of tax deferred savings alternatives such as annuities. And, lastly, longevity risk -- in other words, the risk about living one's wealth really put the spotlight on the value of guaranteed lifetime income, which, to the best of our knowledge, is only provided by annuities.

Competitively, we watch with great interest the actions of our European owned competitors, and we welcome to build opportunities to build market share.

We believe our focused strategy in the fixed annuity market is the right one. We believe it's a strength, even though our concentration of revenues in one business line is sometimes cited as a barrier to receiving higher ratings from the rating agencies. We continue to think that that strong focus in our chosen market is the right strategy and will allow us to further build our leadership in market share in that sector.

Over the last two years, market share has grown from approximately 8% in 2008 to near 12% at the end of the third quarter of 2010. So we've made a lot of progress in terms of our growth in market share.

We do continue to build out the Eagle Life Insurance Company infrastructure, and we believe that diversification in distribution channels is the right step towards continuing to look to developing new revenue streams.

We remain intensely interested in keeping capital levels strong as measured by our RBC ratio. We were very pleased that the RBC ratio remained at 350% at year-end, and we think that's indicative of the efforts that we have taken to maintain a more-than-adequate capital base.

The level of RBC relative to the strong sales growth is a reflection, number one, of asset growth as well as capital support strategies we've adopted in the past including our decision in early 2009 to begin deferring payment of 25% to first-year sales commission.

In addition, we announced last night that we are entering into a new financial reinsurance transaction as well as the renewal of our bank line of credit, both of which helped to maintain more than adequate capital. We continue to be opportunistic in looking at capital-raising alternatives. At present, reinsurance and coinsurance appear to represent the better options.

And with those preliminary comments, I'll turn it over to John to discuss the operating earnings results in detail.

Thank you, Wendy. Good morning, everyone. As we reported last evening, 2010 operating earnings were $109 million, a 7% increase year-over-year. That translated into $1.70 per share. Fourth quarter earnings at $26.4 million were an 8% decrease from the prior year at $0.41 per share. The full year results translate into a return on average equity for operating earnings of 13.3%.

As I'll discuss in a minute, the spread earnings in the quarter were as expected. And the decline in earnings would stem from an increase in certain expense items including our increase in DAC amortization, other operating expenses. And when you look back to the fourth quarter a year ago and then even the quarters of 2010, we now have higher interest expense associated with $200 million of convertible debt that was issued in September of this year.

With the addition of earnings, book value per share at the end of the year was $14.68 excluding the accumulated other comprehensive loss. Or, said another way, with securities at amortized cost, which is how we look to manage the business; and $16.07 per share with securities at market value including the accumulated other comprehensive income.

So getting to spread results, first, on the top line -- investment earnings, which is our largest component of revenues of $1.4 billion for the year, $278 million for Q4. Those represent increases of 11% and 14%, respectively, and those increases are largely going to be based on the growth in invested assets that Wendy talked about. Overall, our investment yield has, on a percentage basis, declined throughout the course of the year as new money purchases were invested at lower rates than what the portfolio was carried at.

Our adjusted yield measured -- looking back to first quarter, was 625. It's down to 607 in the fourth quarter and, as a refresher, adjusted yield, we're adjusting for the impact of higher levels of temporary cash balances that we had throughout 2010. And then also we back out prepayment income. Those adjustments in Q4 were 16 basis points for the cash balances and 11 basis points for the prepayment income primarily on RMBS but also some fees from certain corporate securities, private placement securities. And in a little bit I'll speak to more of the status of cash balances and the outlook for those in 2011.

So new money rates on security purchases -- 535 in the fourth quarter, and that would have been down from 586 in the first quarter. So you can see what transpired over the course of the year essentially investing at 50 basis points less. All told, we purchased $9.6 billion of new fixed income securities in 2010, which $3.6 billion was in the fourth quarter, and those levels reflect both the outstanding sales growth we had and calls of agency bonds. Those calls in the fourth quarter were $1.2 billion with an average yield of 583.

Now looking to 2011, we've got $1.5 billion callable in Q1, $1.4 billion callable in Q2, and then after that the numbers are fairly small. The activity this year, though, I think is going to be -- or the outcome this year is going to be quite different. Throughout 2010, the opportunities to reinvest in agency securities were not there. The differential in yields was not appealing to us. But at this point in time, we are able to go back into the agency securities without really giving up much yield. The securities in Q1 have yields of 565 to 590. We can get back into agencies if we choose to at a 30 to 40 basis point, perhaps, decrease in yield whereas throughout 2010, we were looking at 75 basis points and more. So -- that will help with the reinvestment of cash that puts the agencies back into the mix for us.

And, in fact, for a better part of the first quarter already, we've actually been in the net borrowed position, which has been our historical preference. We did just receive some call proceeds recently, and now today are sitting in cash position. But we expect the additional calls this quarter to be invested, and we should end the quarter in a net borrowed position. So -- the outlook for 2011 is quite different from the standpoint of carrying the high cash balances.

New money rates in our commercial mortgages followed suit with the bond yields declining from 675 in Q1 down to 582 in Q4. We continue to be very active in the commercial mortgage market. We've already closed $94 million this year at about a 567 rate and have a $100 million or so in the pipeline at a weighted average rate of 576.

The other side of the yield equation, though, as we are able to control the cost of money and declining yields throughout the year, were offset by declines in the cost of money. Over the course of the year, it's declined from 3.08% in the first quarter to 2.94% in Q4. As we've talked about in previous calls, we've been benefiting on the cost of money side in each quarter this year from over-hedging benefits holding more options than is necessary to fund the index credits. And, as we've said in the past, our risk management strategy puts us in a position of wanting to be over-hedged. We view that as the preferable position to being under-hedged and having to post an index credit to a policyholder's account without an offsetting return from an option. That over-hedging benefit with 6 basis points in Q4 versus 11 or 12 basis points in the earlier quarters.

And as the cost of money, or the investment yields declined throughout the year, we were paying attention to rates. We made rate adjustments in July to reflect that environment. We also made rate adjustments in January. And these days our option budget, or fixed rate, if you recall from some of our other presentations, we are neutral as to whether policyholders take the index strategy or the fixed rate. But those rates are down at 2% to 2.25%, depending upon which product our policyholders choose. So we're in good shape from a spread standpoint these days on new business.

That rate cut that we implemented in January did contribute to the accelerated base of sales and, obviously, if new money yields continue at current rates, at some point in time I anticipate we would be postured to raise rates. But our history in the past has been we don't make frequent rate changes. We've been slow somewhat to reduce rates on the downside. Similarly, we don't jump at the chance to raise rates. Of course, we always pay attention to what our competitors are doing. We want to be competitive in the marketplace and at the current rates we are there today.

We haven't made any changes to our renewal rates, which would be a more significant impact on our overall cost of money in light of the size of the block of existing business relative to the increase. But we'll continue to monitor those to make sure that we maintain spreads at appropriate levels.

So now moving over to expenses, I think the biggest increase in expenses for the quarter relative to what expectations were, would have been in the DAC and deferred salesman inducement amortization. As you recall in Q3, we announced part of the earnings announcements was an unlocking of DAC, which is required under GAAP accounting to be done periodically when certain conditions are met.

And the impact of that unlocking in Q3 was about $1.7 million. But one of the side effects is it also impacted DAC amortization, sales inducement amortization, in subsequent quarters, and it is causing the amortization to increase in this quarter at about a $3 million higher rate relative to where the expectations for DAC amortization were prior to any unlocking. There is also an incremental $900,000 impact on amortization from the variances we had in the quarter. Our actual profits in the business were less than what we had expected in the new DAC models. That primarily was due to a shortfall in surrender gain income, which is predicting the behavior of policyholders is not very exact. And, on the one hand, we were pleasantly surprised to see our surrender experience be better than what our pricing expectations are. That's good for the long-term health of the business. But it had a negative impact on surrender gain income in the quarter and also then would have added to the imbalance in the DAC amortization.

We also have a non-recurring item in the quarter from changes to some accounting for our single premium immediate annuities that added about $1.9 million of pretax income to the quarter. And that item will not repeat in any subsequent quarters.

Operating expenses relative to Q3 were about $1.5 million higher. $1 million of that would be litigation or legal expenses related to primarily the Stephens lawsuit, which is the Northern California lawsuit that several weeks ago we announced we had reached a settlement on that lawsuit. So the remainder would have been for salaries and benefit type expenses that would have had some correlation to the higher level of sales activity that we had in the quarter.

On the Stephens situation, the increase for the quarter was $1 million, but the aggregate for the quarter was about $2.5 million. So that's an expense that will be disappearing from our expenses into 2011. We'll have some expense in the first quarter related to the negotiation of the settlement agreement and the activities that led up to that as well as the court activities to bring that settlement to a conclusion. But by the end of the second quarter, the settlement should be implemented and legal expenses relative to that case should disappear from our numbers.

Turning to assets and asset quality -- we did recognize just under $16 million of other than temporary impairments in the fourth quarter on RMBS securities. That's largely going to be tied to the rewriting process that was completed in Q4. And part of other than temporary impairment assessment is you consider all available information. The NAIC valuations, or ratings of RMBS securities, are updated each quarter through a process where PIMCO evaluates the bonds. And so there was a substantial amount of new information, a new benchmark to look at in considering impairment analysis, and that factored into our evaluation to recognize additional impairments on the RMBS.

There's a benefit to that, though, in the PIMCO rating process. If you reduce the carrying value of your bonds or securities, you can't hold them or put them into higher NAIC classes and have lower required capital. So -- it's a little more palatable when you think about other than temporary impairments to know that there is going to be some potential offsetting benefit in your required capital to risk-based capital.

Commercial loans -- we did have several loans that we put into foreclosure in the fourth quarter that resulted in just under $8 million of additional loan loss allowance recognition. We have total REOs now of nine properties. We have another 24 properties for $67 million that are in workout status. That workout status, as we've reported before, is primarily providing temporary relief to the borrowers in forms of interest-only payments to principally allow for temporary vacancies in the tenants of the affected properties.

And then summing up -- in addition to that, we would have also then added $1.3 million to our general loan loss allowance to mortgage loans. That brings the total up to $3 million, and that general loan loss allowance calculation principally follows what might be happening on the specific side so that experience in the fourth quarter of some additional allowance enters into the calculation of establishing the general allowance.

Given our relatively short history in the commercial mortgage loan business and the fact that we've had very little experience with problem loans, the general loan loss allowance calculation is one that's evolving as our own experience evolves. But even after all those things, our asset quality remains very high, just under 98% of our bonds are in NAIC classes 1 and 2, which are the investment grade classes. On a rating agency basis, we've got 92% of our bonds at investment grade.

So our commitment to asset quality in the portfolio remains. I know, even over the course of the fourth quarter we were having a shift in our corporate securities at the end of the third quarter. The split of corporates between Class 1 and 2 -- Class 1 being A and above, Class 2 being BBB -- would have been more than 50% into BBB. And that percentage has flipped around to where, at the end of the fourth quarter, we had more than 50% in the Class 1 single A and above and under 50% in the BBB.

And, with that, I'll turn the presentation over to Ron Grensteiner to give you the comments on sales and production.

Thank you, John. Good morning, everyone. As Wendy reported, our fourth quarter sales grew 73% over the fourth quarter of 2009 at $1.554 billion. And sales for the year grew 27% at $4.7 billion. Both amounts are Company records.

As a matter of fact, we broke monthly production records each consecutive month in the fourth quarter culminating with December at $588 million. Some of December's sales momentum was due to the rate adjustment that we've talked about already. Those rate adjustments always cause a flurry of activity. Normally, December is a time when sales are slow due to the holidays.

To put the fourth quarter into perspective, we had more sales in the fourth quarter than we did in our first full three years of operation back in 1997, 1998, and 1999. So we experienced some great success.

Wendy covered the major driving factors for sales growth in her opening comments. Consumers want principal protection and guarantees. And while our rates and caps might be at all-time lows, they are still higher than other safe money alternatives. And, with that being said, as we look at our average index credits for 2010, our average index credits for 2010 were 5.59% -- so very, very competitive.

Other driving factors in sales growth has certainly been our long-term strategy on focusing on distribution relationships and providing the best service in the business. We've talked about this forever. This strategy certainly doesn't have immediate impacts like agent or policyholder incentives would, but it does have an impact over the long haul. It's just good old-fashioned hard work -- one agent, one marketing company at a time.

As an example, in 2010, our field marketing efforts, which are led by Kirby Wood, our National Marketing Director. In 2010, we visited -- we had 400 marketing company office visits. We attended 144 different marketing company events, like sales conferences and training sessions. We visited 836 Gold Eagle agents, and we visited 2,316 other agent visits. It's just a matter of getting out into the field and having one-on-one conversations with our marketing companies and our Gold Eagle agents.

And this is done primarily by a team of six people -- plus Kirby, plus myself, plus Mr. Noble, plus Wendy and a few others, and this certainly isn't something that we started in 2010. We've been at this level of activity for several years. But it is certainly serving us well today. And nobody, I believe, works harder than we do at this. And I'm sorry, we just don't run into other chairmen, CEOS, or presidents in the field when we're out calling on these people.

Of course, all of this is supported by our outstanding home office team and their excellent service efforts, and this is really -- was particularly evident in the last quarter when we were breaking sales records. Our team just didn't miss a beat. We maintained, and I would even say we excelled at the challenge of keeping our excellent service standards. It wasn't easy, necessarily. Our staff came in early, they went home late, some folks came in on Saturdays. Departments who had extra time pitched in to help, and those who had the extra time pitched in for those who didn't. And I'm just very, very proud of our home office team and the great efforts of keeping our excellent service standards the way that they are.

Take a look at pending -- in pending we averaged 5,000 pending applications in the fourth quarter. December had the highest average with 5,447 and, of course, part of that was due to the rate adjustment announcement. If we throw out December, our average the last five months of the year was at 4,400 pending applications.

The count did peak at just over 6,800 in early January, so it's probably a pretty solid guess that our 2011 is off to a good start. Over the couple of weeks, it did start to moderate and has settled in and around 3,800 for now. This is more normal, if you will, but it is still higher than February of 2010, which had an average of just at 2,900 pending applications.

As we look at our rates today, John kind of commented on this a bit. We are still very competitive. There are some interest strategies where we are stronger and others where we are right in the hunt compared to our competitors. We were one of the last companies to lower rates and, since then, a few companies have actually increased their rates, but they basically increased them to where we are today. So we are still very, very competitive, as we've already said.

In 2010, we had 11,377 agents write at least one piece of business for us. That's a record, too. Out of 37,634 that's 30% of our agents wrote at least one piece of business in 2010. Compare that to 2009, we had 8,848 agents write out of roughly 39,000 agents. So that's about 23%. So there's good news in there. The good news is is that we're getting more business from fewer agents.

If you remember, we had as many as 52,000 agents at one time, but we've been trimming our non-producers over the last few years. It certainly saves us time and money by not marketing to them, and it certainly saves us a bunch of money for annual state appointment fees. You might as well terminate the producers if they're not going to write for us and save money all the way around.

We also had our biggest crop of Gold Eagle agents in 2010. We had 1,021 Gold Eagle agents. As a refresher, our Gold Eagle agents are our top producers who write at least $1 million for the calendar year. Our Gold Eagle program is certainly a good indicator of sales success. For example, in 2009, we increased our Gold Eagle membership by 58%, and sales grew by 57%. In 2010, our Gold Eagle membership grew by 15%, and sales grew by 27%.

Our Gold Eagle members consistently produce 56%, 57% of our total annualized premium. We have very specific strategies to retain, to win back and define new Gold Eagle members, and we feel very strongly that if we meet our Gold Eagle membership goals that our sales goals will also be met.

We continue to make an impact with our policyholder appreciation events. We've talked about this in the past, too. We know that people are thinking about their money, and we felt it was an appropriate time to hold such an event. We go out to different cities. We have a one-hour presentation followed by a nice buffet lunch. And our mission is very simple with these events. The number-one mission is to say thank you. We tell them thank you for entrusting us with their money. We also give them some background on American Equity and talk about some important financial statistics.

And, finally, we reinforce the basic benefits of fixed annuities. And we really, really feel if we do these right, and that's with a sincere heart, that there is going to be plenty of side benefits for everybody starting with the policyholders. After our visit with them, they know that they can have some comfort that their money is safe. They always come up to us afterwards with those sound bites, which reinforce why we do these in the first place. They say things like, "Boy, I'm going to be able to sleep better tonight," or "No one else has ever done this for us." And we've had a few say "I wish I'd found you before I lost a bunch of money in the market." We have, certainly, benefits for the producers. They'll probably get referrals and perhaps additional business. And there's obvious benefits for us, the Company, as well.

And there's certainly a side benefit, too, in that when we go out, and we meet these people and see and hear firsthand that they are relying on us to protect their retirement dollars, we always go home more committed than ever to run an effective and efficient insurance company.

So far, we've been to 16 cities. We have had 3,150 policyholders attend and 195 Gold Eagle agents attend. And I pretty much guarantee if we've had 3,150 people attend, there's probably 10,000 people that know about these events because they all go home, and they talk to their children and their grandchildren and their spouses. So this is serving us very, very well from a PR standpoint.

And the cast on these is special, too. Mr. Noble and Wendy or John and myself always go on these. We're supported by an outstanding American Equity staff who make these events go flawlessly. So, again, I don't hear of any other chairmen, CEOs, or presidents doing anything remotely similar to what we're doing with these events. And we're certainly going to continue them in 2011.

Last but not least, we are holding our Fifth Annual Million Dollar Producer Forum coming up in March. Last year we had just over 600 total attendees at the event. This year we are expecting nearly 900 attendees. For agents to attend, they must prove that they wrote at least $1 million in annuity business during 2010. It doesn't matter if it was with another company or American Equity -- just that they wrote $1 million. Attendees attend, of course, producer -- with the attendees are the producers, their guests. We have NMO representatives attending and, of course, our home office personnel. And of the producing agents that attend, 43% of them this year qualify to attend by producing for another company. So you know our mission after this event is over will be to convert those 43% of attendees to American Equity producers. We've had a lot of success with this program and so, hence, the reason we keep doing it.

Of all the marketing programs and trends that we talk about, this program may be indicative of our 2011 success. When you look at the fact that we have a record number of attendees, that certainly indicates a high level of interest in American Equity. The attendees are paying their own transportation costs to come. And also we just finished a round of marketing company roadshows. And this time of the year, we typically get out and visit with our top 15 marketing companies. We say thank you for their business last year. We strategize about the upcoming year, and every single marketing company that we visited with, we're very optimistic about continuing sales growth in 2011.

So, with that, that concludes my report, and I'll turn it over to the operator for questions.

(Operator Instructions) Randy Binner, FBR.

Thank you. Good morning, everyone. I guess I'll just start off with capital management. And appreciated the commentary just kind of describing that reinsurance seemed to be the best option now to keep capital adequate, especially if Ron is correct that sales seem to be at least on pace for this year to a similar level as last year. But I guess maybe just kind of longer term, how staying near 350% is adequate relative to the goals you want to accomplish with rating agency upgrades.

Sure. You know, as we've talked about in the past, 300% was established as the minimum for our current rating back in 2006 when that A-excellent rating was reinstated by AM Best. As we've thought through our strategies for getting an upgrade, we've talked about managing to that higher capital level.

It's not for sure that managing to a higher capital level will, in fact, result in an upgrade. And so we continue to question, ponder, whether devoting more capital is going to be worth it in the end if it does not produce an upgrade.

That being said, we do remain intensely interested in keeping our capital strength very strong and well above that 300% minimum. We were real pleased that it came out at 350% in light of the pressure that we anticipated on risk-based capital from the sales growth. And that really does reflect the fact that we're a much larger company from the standpoint of invested assets. And when we get to our corporate modeling project later this month, which is our principal tool for evaluating capital adequacy, we feel confident that that model will show that we are able to support a much higher level of sales.

We are thinking about reinsurance and coinsurance, and we did put in place the new treaty that will provide $50 million of pretax surplus benefit with Hanover. That is a lower-cost form of capital. We have not yet entered into agreements to have additional coinsurance for 2011, but we will consider that once we get the results of the modeling effort done and see what the projections for RBC look like.

You know, at some point, we would love to be able to go back to the capital markets to raise long-term capital to support our growth, but we just won't do that as long as our stock is trading below book value. So that remains a long-term hope, but we need to see some more market price improvement before that becomes a reality.

In terms of debt markets, we've effectively used, I think, convertible debt. I think we've maxed out or are close to maxing out the amount of convertible debt we should hold on our balance sheet. In terms of straight debt, it's too costly at present, given our current ratings and the current rate environment. And we really don't want to increase the overall leverage -- debt-to-capital leverage. We'd like to see those ratios continue to come down, and we think that's an important factor in our rating agency discussions as well.

Thank you very much. And I guess just a follow-up on that, and maybe this question is for Ron, too. You touched on it a little bit in your commentary. Is A minus -- I mean A minus is clearly an adequate rating for the distribution and the end user that you have now. But just thinking longer-term as the regulatory and legal issues of the index annuity product lift, do you see the product being sold by other larger insurance companies? Do you think that American Equity really needs to be in the kind of more broader distribution channels like banks and wire houses or can American Equity, longer term, three to five years out, continue to be more of an independent insurance agent focused distribution?

Well, from my standpoint, Randy, when we're breaking the records and have the great sales growth that we've been experiencing with an A minus rating, I think it becomes less and less important to our marketing efforts.

Your comment about bigger insurance companies getting into our space -- frankly, I kind of look at that as a positive in that the more companies that start to promote our products perhaps will get the credibility that we deserve in the popular press. And so I look at that as a positive.

Will it steal from our market share? I don't think so because our policyholders are more Middle America policyholders. I think the independent agent channel would have a preference of American Equity over, say, the much larger insurance companies.

So I don't see -- it's a longwinded answer, Randy, but I don't see our rating as a deterrent at all for future growth, and I welcome other big insurance companies getting into our space.

Steven Schwartz, Raymond James.

Just to follow up on Randy's question about capital and realizing that you haven't done the study yet -- I think in the past, Wendy, that you've thought that you could do about $4 billion of sales annually and still be self-sustaining capital-wise. Is that still accurate?

Well, that was based on last year's model, and what was interesting about the 2009 modeling work is that that $4 billion threshold represented a big increase over what the models of the past showed in terms of our ability to sustain earnings.

So I believe that when we get to the modeling process for this year with the additional asset growth in 2010, that that's going to push that self-sustaining number above $4 billion. But I can't speculate at the moment by how much.

Okay. That's more than fair enough. Looking at the efforts of the broker/dealer channel, I think you've intimated in the past that you thought you were near possibly a marketing agreement with the BD? Could you update that?

Yes, we have put in place a national sales director for Eagle, and he's working on a variety of issues related to putting together the infrastructure for Eagle, including reaching out to various BDs. There are a handful of agreements that are in place, although we don't anticipate that sales of registered index products will begin until the second half of 2011.

Okay, great. And then, John, did you happen to say how much new money was put into commercial mortgage loans in the quarter? I might have missed it?

You know, it was on my outline, but I might have overlooked it. But 113 was in the fourth quarter; 317 for the year, I believe. Yes.

Paul Sarran, Macquarie.

Thanks. What new money yield was assumed in the January 10th set of rates?

470.

And that compares to 535 in the fourth quarter?

The way we look at new money rates, Paul, though, is we look at a combination of, okay, how much money is being -- how much is being freed up from the outflow? So the portfolio yield -- a portion of the portfolio yield would have been allocated to new money and setting those rates. So the blended yield we were looking to get was a 495 of which 470 was coming from new investments and then an incremental 25 basis points from what was already in the portfolio.

Okay, so the 475, though -- it's comparable to the 535 that you cited as new money put to work in the quarter?

Right.

And then, Wendy, did you say that there are now selling agreements in place with some broker/dealers and you do expect sales of the registered product to begin in 2011?

There are a handful. And the initial focus was on BDs that have been set up by the national marketing organizations we already work with. And then, of course, the long-term plan includes reaching out to other broker/dealers, and that work has begun as well.

But we continue to work on marketing materials, training materials, IT infrastructure. And for all those reasons, it's unlikely that we will have sales prior to the second half of 2011.

Okay. What are the biggest hurdles that you're seeing to get selling agreements in place with the, I guess, non-NMO-related broker/dealers?

I think it's just an education process, principally, Paul, about the nature of the products and how they function. We have seen issues in the popular press that continue to perpetuate myths and misperceptions about the products. And so that's a barrier we need to overcome.

As we talk about other insurance companies entering the market, some of the larger insurance companies, in many cases, those are companies selling through the broker/dealer channel, and their entrance into the market, I think, would be helpful from the standpoint of overcoming some of the perception problem.

But there's a whole set of variables that go into developing the relationships with broker/dealers including pricing of the products, the compensation structure, the level of support that we can provide for the products and the training here at American Equity. And so it becomes a long-term discussion with each broker/dealer to iron those things out.

Okay, and then -- sorry, one more question. What's the benefit of selling through an NMO-controlled broker/dealer versus selling a non-registered product through the NMO?

Well, if that NMO has a salesforce that's attached to their broker/dealer, as well as their independent agents selling the non-registered products, then that simply represents another growth opportunity that we don't have today.

Mark Hughes, SunTrust.

Thank you. And to follow up on that, are you seeing any movement yet among broker/dealers or larger insurance companies to sell the products?

Registered index products or traditional fix?

The registered products?

Not so much. We hear talk of it, but we don't see that much activity. I do know there's one company out there, I believe it's AXA, that has added a couple of indexed annuity strategies to a variable annuity product. And they're marketing that as a way to have marketing exposure on the VA side, and then the protection of the guarantees on the indexed annuity side. I don't know how much traction that's getting for them in the market.

Maybe you talked about -- maybe not affiliated broker/dealers. You wouldn't see or you'd be unlikely to see anything before the second half of 2011? Is that to say we could see something in Q3 or Q4? Or is it more likely 2012?

Oh, no. We're hoping to see some sales beginning in Q3 and Q4. That's the goal.

And then competitors -- you talked about how some have raised rates lately, and maybe they're at rates that are comparable to yours. How about from a commission standpoint? How committed are they to the market? Are they getting more or less aggressive on commissions or sales inducements?

The commissions are fairly even when I look at our primary competitors. Commissions have come down from pretty much everybody. I'd say the typical commission amongst our competitors is 7% up front, where we have 6% up front plus 1% in the 13th month and 1% in the 25th month. So those have come down and moderated somewhat.

One of our competitors does have a sales inducement out there in the first quarter, and it's the only one that I know of at the moment. And I don't hear a lot about it. I think they're just probably trying to get their sales jumpstarted for the year.

Bill Dezellem, Titan Capital Management.

Thank you. Relative to your cash levels that have been running above normal now for a few quarters, when are you anticipating, as you look forward into '11 that -- basically, which quarter is it that you will get back to normal cash levels are you forecasting?

Well, our normal position, Bill, is we'd like to be in a borrowed position, and we'd like that to be one to two months' worth of sales. Now, we arrived at that one to two months back when our sales were in the $200 million to $250 million a month range. But we were looking to keep a repurchase agreement balance of about $400 million to $500 million. And, of course, the benefit there would be that the investments were purchased, and we would start earning the spread on day one.

We did hit repurchase agreement activity in January of this year. We ended the year, I think, with $100 million of cash, and we had bought some agency securities for settlement in January, which absorbed that cash. And our first call didn't happen until February 3rd. So pretty much the month of January we did not have net cash position. We've been kind of in and out in February. The calls on February 3rd, I think, put us to net cash. We're sitting there today, but we have some settlements today and Monday that move us into a borrowed position. And then we have some calls, I think, next week that are going to put us back to a cash position, but we are also forward-purchased on investments. So we would end the quarter in a borrowed position again.

The high levels of cash balances are likely behind us this year. When we kind of get back to a fully borrowed position, which would be our normal practice or desire, that may be more end of second quarter beginning of third quarter, depending upon what happens to calls in Q2.

In Q2 the calls are about $1.4 billion scheduled, although a little more than half are at rates of 575. So in today's environment, those likely could be called -- there's about $650 million at rates of 530 or 535. If rates stay at current levels, those may not get called. So we could even have less than what's on the agenda, which would put us back into a borrowed position probably a little quicker than the end of the quarter -- second quarter.

So to summarize, in essence, you feel like your cash position, the excess cash that that's probably behind you. And then to get into your net borrowed position as you want to be, you really need to work through the next two quarters of calls. And that may actually happen a little bit sooner given that some of those call rates are a little on the low side and, therefore, may not be called?

And that's if rates don't change from the current levels.

Understood.

Obviously, any decrease in rates would add more risk to the calls happening and what we might want to do on reinvestment. Higher rates would obviously work to our advantage because perhaps we would have even less of the calls exercised, and we wouldn't have to deal with reinvesting the call proceeds.

We have no further questions at this time. I will now turn the call back over to Julie for any final remarks.

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