American Equity Investment Life Holding Co (AEL) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Quarter Two 2011 American Equity Investment Life Holding Company earnings conference call. My name is [Kelly] and I'll be your coordinator for today.

(Operator Instructions).

I would now like to turn the presentation over to your host for today's call, Ms. Lisa McQuerrey. Please proceed.

Thank you, Kelly.

Good morning and welcome to American Equity Investment Life Holding Company's conference call to discuss second quarter 2011 earnings. Our earnings release and financial supplements 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.

And it is now my pleasure to introduce Wendy Waugaman.

Thank you, Lisa, and good morning to the call.

To sum up the second quarter of 2011 in a couple of words, we would say that it continues to be a positive environment for sales, although a challenging one for investing in light of the very low rate environment.

Sales for the quarter were at over a billion, $1.11 billion. That's before co-insurance of $70 million. Based on the most recent industry data available, which actually comes from the first quarter, we've now risen to an over 16% market share. We're number two in terms of market share. While we've yet to see the second quarter data come out, we're hopeful that that position will have strengthened in the second quarter.

Operating earnings were at $29 million. That's basically flat if you compared year over year to the second quarter of 2010. That, in our view, continues to reflect the impact of the very low-yield environment. We have been experiencing a small contraction in spreads over the last year, primarily attributable to the declining overall yield in our portfolio.

We've responded to that with adjustments in our new money rates offered to policyholders. But in light now of the continued decline in spreads, it's our intention to examine carefully renewal rates to existing policyholders. And John will be discussing that.

The signs for growth in the overall market the indexed annuity market, fixed-rate market remain very, very positive. Annuities have now become a hot topic in the popular press and they're getting attention in some very surprising places. In July, the US Government Accounting Office published a study on retirement income which actually starts with the recommendation to consider the use of annuities in retirement savings. The focus now seems to be shifting to management of income during retirement as opposed to accumulation of assets, which puts a nice spotlight on annuity products.

In addition, Barron's came out with a very positive article that said, quote, "Annuities are now shining in a big way," close quote. In that same article, America Equities Bonus Gold Annuity was recognized as one of the top five smart choices among indexed annuities based on the five-year returns in that product. In the last quarter, even the New York Times and SmartMoney had positive reports about annuities.

That's a lot of positive press in one quarter. We're not really used to that. And when you add to that ongoing market volatility caused by European debt crisis, US debt crisis, it appears that annuities are headed towards a new level of importance in growth.

So as we think about our goals for the next 12 to 24 months, we have several specific goals. And those include to, one, capitalize on the growth trends in the market and the strength of our competitive position. And of course Ron will be discussing that. We are continuing to build our efforts to bring a new distribution channel, and we hope to see that come to fruition in the form of new sales in the latter half of the year, and I'll discuss that more a little bit later.

Thirdly, we're going to intensely focus on spreads to make sure that, as we continue to grow our assets, because we've had very positive trends in asset growth, that the operating earnings are building consistently with that asset growth.

And last but certainly not least, we intend to remain in the upper tier of life companies in terms of our return on equity results. Return on equity for the second quarter based on the trailing 12 months was over 13%, as it was in the first quarter. And we continue to believe that that's a very strong result even with earnings basically flat.

With that, I will turn it over to John.

Thank you, Wendy; and good morning, everyone.

As Wendy remarked, operating earnings in the quarter were $29 million or $0.45 a share. That's up a couple of pennies a share from the adjusted number from first quarter. Just to remind everybody, in first quarter the reported number of $0.47 did have a $0.04 adjustment related to -- or $0.04 benefit related to a [S-FIA] reserve adjustment, so the trend moving up; and then relative to a year-ago second quarter where the EPS was $0.48. One of the big differences of $0.48 to $0.45 would be the fact that we've got higher interest expense these days from our convertible note issuance in September of 2010 where the proceeds of that were used to refinance the bank line of credit borrowings that were scheduled to mature later this year.

Spread results for the quarter. The reported spread was 3.05% with total invested asset surpassing $21 billion. Spread results have been declining. A year ago we were at 3.23%, and last quarter it was at 3.14%. And the reason for that trend has been the fact that the investments of new money have been at much lower rates, and the yield on the portfolio has been declining at a faster rate than the reductions in cost of money. And that yield has declined 36 basis points on the investment portfolio.

We've been managing the cost of money through adjustments to new money rates, to policyholders. We've made just one change this year, earlier in the year, that filed some changes in 2010. And we have at this point in time the lowest rates we've had in the company's history. But that's only translated into a decline of 18 basis points in the cost of money. And as Wendy remarked, we have not adjusted renewal rates. As a matter of fact, we haven't adjusted those in quite some time. The last adjustments, you'd have to go back to 2007, 2008, for the last time we've had renewal rate adjustments.

And that will be on our radar for this quarter, to take a look at the book of business and figure out where it's appropriate to make adjustments relative to the declining portfolio yield. Of course, we're always going to look to maintain rates -- or maintaining rates has been a competitive edge for us, we think in the marketplace. We'll take that into account as we look at the decision to -- which rates to be adjusted.

A couple of items on spread, as we've remarked in previous quarters, we've got a couple of items affecting spread, from both positive and negative. On the investment side, given all of the call activity that has transpired over the last number of quarters, we've had several quarters now where we hold excess cash balances. That added 11 -- or reduced spread, excuse me, by 11 basis points in the quarter. The average balance was $395 million.

We've also -- partially offsetting that has been benefits from over-hedging, which our philosophy in hedging the index annuity risk is to be in an over-hedged position that's viewed as the less risk relative to not owning in an option to fund that index credit. Net benefit of over-hedging was 10 basis points in the second quarter.

And as we look at third quarter on the hedging side, we do see that we're in an over-hedged position again. Of course, the ultimate outcome will be dependent upon what equity market performance is for the quarter, and we've got roughly two-thirds of the quarter left to go.

So when you factor in those adjustments, the adjusted spread for the quarter was 3.06% compared to 3.12% in the first quarter and then 3.22% a year ago.

So, turning to investment yield, the reported yield on total invested assets was 5.78%. That's down from 5.96% in Q1. Adjusted for the cost of liquidity -- the excess cash balances, it would have been 5.89% in Q2 compared to 6.01% in Q1. And as we've said, that's been occurring because of the declining yield available on new investments.

During the quarter, we purchased $1.7 billion of investment securities with an aggregate yield of 5.39%. Those purchases consisted of agency bonds, $519 million at 5.36%; corporate bonds, $925 million at 5.42%; taxable municipal bonds, $214 million at 5.25%; and residential mortgage-backed securities, $41 million at 5.58%.

Of course, though, given what's happened to rates lately, that 5.38% rate is -- 5.39% rate is probably not likely a rate that would be replicated in Q3, unless interest rates were to change course and move up dramatically fairly quickly. So, even more the reason to be paying attention to the cost of money and renewal rates.

On the call side, during the quarter, we had $1.5 billion of bonds called. The yield on those bonds was 5.66%. The good news on the call side is that we've got no significant calls in the hopper for the balance of this year, with the exception of the last four days of December when there's about $350 million that could be called. So we anticipate that the cash we had at the end of June, which was about $530 million, should be fully deployed into longer-term investments by the end of this month. And the issue of reduction in investment yield and temporary cash investment should not be present in the fourth quarter for us.

We made $152 million of new commercial mortgage loans in the quarter. The average yield on those was 5.88%. That continues to be an asset class that gives us very good yield and very good characteristics in terms of matching up assets and liabilities from a cash flow standpoint.

Our overall asset quality remains very high, 98.6% of the bond portfolio is in NAIC classes 1 and 2, which are the investment-grade classes. On a rating agency basis, we've got 93% of the portfolio in investment-grade securities. And that difference of 5%, 5.5% is in the RMBS where the NAIC rating mechanism takes into consideration the values at which you own the RMBS, whereas the rating agencies do not.

And with many of our RMBS purchased at either discounts to par or impairments recognized through the years, those have been taken down to levels that justify the higher ratings that we get from the NAIC.

And you can kind of see that pretty clearly if you look at a page in our supplement, page 12, which is also published in our 10-Q, where we schedule out our RMBS. And the RMBS securities where we have not recognized or have not had to take any, other than temporary impairments, today sit at a market value that is 104% of amortized costs. The ones where we have had to take a write-down are now sitting at 92.5% of amortized cost. So the risk of impairment has been significantly diminished based upon those market values.

On impairments and the investment losses, the net after-tax losses in the quarter were $1.3 million. That consists of $3.3 million in the commercial loan area, commercial mortgage loans, $2.2 million was additional impairments on RMBS. And then there would have been some gains recognized of some security sales, and of course it's netted down for DAC and tax adjustments as well.

Commercial mortgage loans, the information we published in the 10-Q is rather extensive concerning the inventory of mortgage loans that we have under consideration or consider potential issues. That has ranged over the last several quarters from a pool of $113 million to this quarter it's $117 million. And we have allowances against those loans of $15 million. So, pretty much less than 5% of the commercial mortgage loan portfolio are loans that are of concern to us for potential impairment.

Looking further to the income statement, product charges were $19.9 million in the quarter. That line includes both the historical surrender charges that we have collected when people terminate early, and then in recent quarters, fees for the lifetime income benefit rider.

So, during the quarter, the split was $12.9 million from surrendered gains and $6.9 million from the lifetime income benefit rider. The surrendered gain numbers have been coming down a little bit. I think that reflects the interest rate environment we're in today where people are staying with the older policies which carry the higher rates.

On the lifetime income benefit rider side, we do have expenses in the interest credited or index and -- indexed product benefits, that pretty much match those fees. So we're creating liabilities and expensing them for the expected future cost of that lifetime income benefit rider. And so, it's been relatively neutral to our earnings for the last several quarters, fees equal to expenses.

Operating costs and expenses were $16.6 million. That's down about $1 million from $17.5 million in the first quarter. And that would principally be in the areas, reduced legal fees and lower insurance taxes.

Our RBC, as we reported last night, was 3.39%. That's pretty much at the level it's been since year end and first quarter. We're comfortable at that level, that we've got adequate regulatory capital to sustain the sales growth or sales at the current levels we've been experiencing. The RBC does reflect appropriate risk charges for all the asset classes, including those that are the, you know, under the heavier scrutiny these days, commercial mortgage loans and the RMBS.

And with that, I'll turn the call over to Ron Grensteiner.

Thank you, John. Good morning, everyone.

As Wendy reported, sales for the second quarter were $1.11 billion, a 6% increase over the second quarter of 2010. We remain optimistic for a solid second half of 2011, as people still have a strong desire for principal protection and guaranteed income. And Wendy mentioned that there are some recent articles in unlikely sources that have touted the need for annuities, and so we're certainly pleased with that.

To help our sales momentum, we continue to look at additional products and benefits to fill some market needs. But it really just boils down to continuing to promote American Equity's true value-add, with simple, straightforward products and the best customer service in the business.

As an example, we're calling on the attendees from our $1 Million Producer Forum that we had earlier this year in March. Now if you'll recall, we had 475 producers attend who had to prove their qualifications to be there, and that is they had to write at least $1 million of fixed annuity premium in the previous year.

Just over 200 of them qualified by writing their business with other companies. And we had a very specific follow-up plan to contact those people, which included some personal one-on-one visits with about 175 of them. And so far, we've received about $35 million from this group since the event, and we've received well over $200 million from all the attendees that were at the Las Vegas Producer Forum. So that continues to be a good event for us.

We also are having -- are getting ready to launch a blitz campaign for producers that we want to get re-engaged with us, that wrote some business with us last year but we haven't seen anything from -- haven't seen anything from them yet this year. The competition has been very aggressive this year, as we've had a couple of new entrants into the market, and some of our regular competitors seem to want their producers back, that we won over in 2009 and 2010.

There's been a fair amount of new product developments and some new riders, and so the producers have been a bit distracted as they looked for the best deals out there. And introducing new products and riders in this rate environment is certainly a challenge. So the companies that we're competing against are trying to get some market share by touting, for example, the highest rollup rate for income purposes. But when you really open the hood and look under, it may be a high rollup percentage but it's really based on simple interest instead of compounding interest.

So, one of the things that we're trying to do is just basically reach out to producers and re-educate them on American Equity and how our products have true value and compare to our competition.

So when we looked at this blitz program, we'll be reaching out to those producers with emails, letters and phone calls over a one-week period, where everybody in marketing, including myself, will be on the phone to win back these folks from 2010. So we'll have more reports on how that went over later.

Good bellwether for how sales are going is our Gold Eagle membership. As you recall, our Gold Eagle members are our best producers. Those are the ones that write at least $1 million annually with American Equity, and we are ahead of schedule for 2011. We have 1,192 agents through June who have either qualified or are on track to qualify by the year end. So that's a positive sign.

We also just wrapped up our 2011 convention period. We have a record number of qualifiers, 414 compared to 281 from a year ago. We have some very impressive producers at American Equity.

And in this -- during this past convention period, for example, those agents that wrote more than $2.5 million increased by 36%. Those agents that wrote more than $7 million increased by 66%. We had 53 producers write more than $7 million during this past convention period. Those that wrote more than $8 million increased by 90%. We had 38 producers write more than $8 million with us. And even our $10 million-plus group was very impressive. We had 17 producers write more than $10 million with us.

So, frankly, when we look at our statistics and these agents, they are certainly -- are most consistent with us, and we've developed those relationships and we've built those relationships through great service and just being out there and being there for them. We've been very successful in retaining top-notch producers at American Equity. And I guess if we have any turnover, it tends to be the producers that write less than $2 million.

So when you look at the big picture as far as our Gold Eagle producers and our qualifiers for convention, we're writing more business today with fewer agents and more consistent agents than we have in the past. We're doing our current production with 33,000 agents where last year at this time we had 38,500 agents.

Also, and as Wendy mentioned, we're getting, with fewer agents and more consistent agents, a larger market share of the indexed annuity sales, as reported in the first quarter. And I think Wendy mentioned that was 16% market share, and we're looking forward to the second-quarter numbers. We think we'll continue to be very strong.

When we look at pending, that's always another bellwether of course. In the second quarter, our pending was in the 3,100, to 3,300 range. We have seen some increased activity during July. Our app count grew each week. And as of today, our pending account is two cases short of 3,600, and it hasn't been at 3,600 since mid-April. So we're very positive about that.

When we look at some of the competition, obviously Allianz, who was our probably -- well, not probably, is our number one competitor, they recently announced their new Allianz Preferred Program. This is a special product that they're making available for a select group of marketing companies.

For starters, seven of our top 10 marketing companies at American Equity either did not get invited or chose not to join this group. And some of those marketing companies have been very staunch supporters of Allianz over the last several years and are feeling a bit betrayed. So as a result, we really feel that we're going to get a larger portion of business from those marketing groups that decided not to go with the Preferred Program.

And that's exactly why American Equity is not interested in having any producer groups or clubs or proprietary products. We really feel that our success is as a result of all of our marketing companies and all of our producers who helped us achieve the levels that we're at. And the day we start excluding marketing companies and agents is the day that we kind of forgot the very basics of relationship-building. So we're not going to go in that direction.

The product itself that they've rolled out does have some appeal, but the S&P 500 actually has to perform. Our model, if the S&P performs, is good too, but we put more emphasis on guarantees which is what we think that people really want today, especially in today's environment.

As we look to our other initiatives that we have on a regular basis, it's -- one is our producer forums that we have here in the home office. This is an opportunity to bring producers to Des Moines on our nickel so they can hear our story, learn about our products and witness our culture first-hand.

We have a group in today, as a matter of fact. There's about 35 agents in the other room. We've had nearly 300 agents come to our office, and we have six more programs scheduled by the end of the year. These are very good programs that we've done for five years now.

Our policyholder appreciation events also continue to be very successful. As an example, we had an event in Schaumburg, Illinois in June where we capped out at 200 people at the event and we had 150 people on our waiting list. We decided to go back, invite those 150 that were on our waiting list, and then invite some additional people that didn't respond to the first event. We capped out again and had another 100 people on another waiting list. So we had a waiting list for our waiting list.

So, these successes and the sound bites that we hear afterwards confirm the rationale and the reasons that we're doing these things in the first place. People want to hear from us. They want to know that American Equity is a well-run company. They want to meet the people who are running the company. We give them some history about us and we talk about some of our philosophies at these events. We talk about our strong financials and give them some assurance that their money is in a safe place.

And we also reconfirm the basic benefits of fixed annuities and the very reason that they bought them in the first place. And more importantly than anything, is we just say thank you. Thank you for entrusting us with your money, and give them some assurances that they're in a good place.

So when you look at these policyholder appreciation events and when you look at the producer forums that we have for agents, they are right in the sweet of American Equity, and the basic principles that we look at of building relationships and providing the best customer service in the business. We get, every time we do, whether it's the customer, policyholder appreciation events or the agent producer forum, we probably get a half-a-dozen phone calls, emails and letters every single time, telling us how much they appreciate them and how much they learned. And so we're going to keep doing them until they quit coming.

So that is my report. And I will turn it back over to Wendy.

Thanks, Ron.

A quick update on Eagle Life Insurance Company and our efforts to get sales moving in a new channel, which is the broker-dealer channel. We continue to work on getting selling agreements in place. We do now have an important new selling agreement with a national retail broker-dealer, and we've got discussions underway with several others that could be very significant for us. We continue to work on getting the additional building blocks in place, including agent appointments within those broker-dealers, marketing materials, et cetera. Because this relationship is so new, we're going to wait until next quarter to report with more details on that, but it's a very good development for Eagle.

We do expect sales to begin in the third and/or fourth quarters of 2011. We would expect to see smaller volumes initially as we gain traction and hopefully building on into the future.

So, sales growth in 2011 from broker-dealer-related sales will probably be relatively small compared to our traditional channel, but we continue to believe that the broker-dealer channel has a lot of potential for us in the future.

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

Thank you. (Operator Instructions).

And your first question comes from Randy Binner of [Frank Berry Robert Capital].

This is Randy Binner from FBR. That's a new one.

So, hey, thanks. I guess, John, in your comments on commercial mortgages, I think you were talking more about the exposure. But it seemed like the required capital line picked up a good guy this quarter, meaning it became less onerous than we would have thought, and it seems like there may have been some shift around capital posting for securities.

So, just trying to get a feel for kind of what made the RBC better than at least what we thought it could be. And maybe a little commentary on, if you had kind of a level rate of sales for the rest of the year per quarter, maybe a little over $1 billion, what kind of RBC outlook that would lead to?

Well, the RBC at 3.39% did have a good bump from statutory earnings which have been good. And there was a benefit from -- on the mortgage -- required capital for mortgages. Mortgage capital has something called the mortgage industry experience factor, the acronym MIE, for those of us in the business, and it takes a company's experience relative to an industry experience.

And at yearend 2010, our experience was 25% greater than the industry, so we were having to hold a little higher capital than the norm. And that has contracted in the June -- or as of the June quarter. Our experience has remained level; the industry experience has elevated up a notch.

So we're now sitting between [1.10], [1.15] is that experience. And we anticipate that our number might even come down a little bit more, or come down a little bit over the balance of the year. Whereas in the last couple of years, we went from a mortgage experience adjustment of 80% up to 125%. What it's looking like this year might be some reversal of that experience, which obviously would then reduce our required capital.

And then the numbers we have in for premium volume, which is the C4 business risk in risk-based capital, we always operate off of 12 months -- trailing 12-month sales numbers. And of course last year, the third and fourth quarters were very strong sales volumes for us. So those numbers are still in there, which puts our aggregate number in that calculation at the moment at $5.15 billion of sales. And of course, we were at $2.45 billion of sales through six months year-to-date.

So, second half of the year sales of $2.7 billion would leave that metric stable. And at the moment, we're not quite at that run rate, with sales of $1.1 billion or so in the second quarter; that's more like a $2.2 billion, $2.3 billion run rate. So the required capital on the balance of the year, depending upon what sales -- might be a little bit less than what's in the June 30 calculation.

Yes, that's helpful. So I think -- I mean, I guess the punch line is, is that the RBC track could be better. And I guess, I'd just be curious if you think it's fair to say then that the trajectory towards 300 might be more, you know, not as much as we thought earlier in the year, meaning that the incremental need for reinsurance or some other form of capital to fuel growth might be less now than it was earlier in the year?

Based upon the outlook now, I would agree with that. Yes, Randy.

All right. I'll drop back in. Thanks.

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

Thank you very much. The increasing sales activity in July, any particular reason for that?

Mark, I think some of it has to do with Allianz's decision to go with the Preferred Program. As I talked to some of the owners of those independent marketing companies, they're kind of frustrated, and as I mentioned, kind of feel betrayed. So they're telling me that we're going to get a larger share.

I think another part of it is just vacations are over, agents are starting to get back to work. And I think that there is starting to be a few companies that are starting to pull back a little bit. We've seen just recently that Midland National, or the Sammons Group, has reduced their bonus on one of their products, and Allianz has reduced a bonus on their top-selling product too. So that just helps us as well.

Okay. How about a few words on where you stand with respect to minimum rate guarantees? I know you've got a lot of disclosure in the documents. Anything you could say, just to share a general perspective on it?

This is John Matovina. Yes, I mean, fixed rates relative to where we can lower fixed rates to are easily 50 to 60, 70 basis points away from where those -- the effective minimums might be, and I'm speaking here to new business sales, not the overall portfolio, which is an even broader target.

On our caps and participation rates, our new business sales -- or new business offerings these days are a little bit above where those minimum caps are. And that has signaled to me, and our compliance department will likely have to get after this fairly soon, the fact that we need to re-file those products to put some lower minimums in there if rates are -- if rates were to move lower from here.

If we are sustained at these fairly low rates, how long until it becomes an issue, a material issue for the company?

I wouldn't say it's material because it'd only be relative to new sales, and you can get products filed and available in a reasonably quick period of time.

And that would only be if rates continued to move downward, because, as John indicated, we've got a good cushion above minimums at present.

Right. And then one final question, the operating expenses, at a fairly modest level. Should they be sustained at about this pace or move up a little bit?

Well, I'm always hesitant to predict operating expenses, but I think at these levels, they're probably not likely to move down any more. So, moving up a little bit is probably not an unreasonable assumption.

Thank you.

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

This is [Marina Davidson] for Steven. I was actually curious about the new Allianz program, so thank you for going over that. My remaining question is for Wendy. Anything new from Illinois with regard to the Securities Department? Do you mainly index annuities or securities? And is there any fallout in Illinois or other states?

There have been some developments on that front. And just to back up a little bit, there was a decision that was the outcome of an administrative hearing that involved some specific agents. Those agents happened to be also registered investment advisors, and so they are within the jurisdiction of the Illinois Securities Department. Those agents had engaged in a series of replacement transactions, of which the suitability was questionable.

There was a hearing within the Illinois Securities Department, which is governed by the Illinois Secretary of State. It's the Secretary of State who is the final decision-maker in that administrative setting. And it was concluded that the agents, as registered investment advisors, had breached fiduciary duties that are associated with their status as registered investment advisors in connection with the transactions.

In the course of the -- in the course of the decision that was rendered, the Secretary of State recited the definition of securities in the Illinois Securities Act, which is a 1950-something version of the Model State Securities Act, so it's very old, and it doesn't contain the typical exclusions for annuities that we see in states that have adopted a more updated version of that law.

That definition was recited. It does not include an exclusion. And the decision-maker went on to say that the, quote, "Investment plans," close quote, used by the agents were within the definition of securities. So, the order itself did not state that annuities are securities. It did not state that insurance agents who do not have securities licenses cannot sell the products. It did not say that registration of the products would be required.

So, some of the conclusions that had been drawn about that ruling we really think are overstated, and our initial reaction was that, in many ways, it was a (technical difficulty).

We've had a discussion with the Illinois Insurance Department. Several representatives of industry met with the Insurance Department. It remains their staunch position that annuity products are solely regulated by the Insurance Department in Illinois. They've got a bulletin out to that effect. And what we believe will happen now is a dialogue between the Insurance Department and the Securities Department in Illinois to make sure that there isn't a conflict in the positions of those two departments.

The agents who were subject to the underlying ruling did appeal that ruling in to circuit court. However, the appeal was rejected and thrown out by the court due to a procedural issue. Again we've yet to learn whether or not the agents will file an appeal of that decision. But at least at this point, that appeal is no longer pending because of that procedural issue. And we continue to monitor what's happening between the Insurance Department and the Securities Department on this issue.

There's been speculation from, really not so much the agents and industry, about what this means for agents in Illinois. I think at the moment it's business as usual, until there's more information coming out of those departments.

Well, thank you, Wendy.

Your next question comes from the line of Bill Dezellem of Tieton Capital Management.

Thank you. With all of the different cross-currents that you have going on, which quarter would you anticipate your operating income to be above the prior year?

I've got to look. The best quarter we have, Bill, is $0.48 in the -- as far back as this goes, second quarter of a year ago. Is that the benchmark you would be looking at then?

Well, yes, just from -- really I'm looking on a go-forward basis from the perspective of which of the future quarters would you anticipate would be the first one where operating income would be higher than prior-year operating income.

Oh, than prior-year quarter? Okay.

Yes.

So, third quarter 2010 was $0.45 a share, and that's what this quarter was. So I would expect the year-over-year -- or quarter-over-quarter comparisons next quarter to be up. And of course that will coincide -- actually, the debt issue that is leading to the higher interest expense was a September 15 issue, so it was there for part of the third quarter last year, but not all of it. So the growth in the business is finally overwhelming the impact of the higher interest expense.

And then, fourth quarter operating earnings were $0.41 a share, so, continuing development of the progressions that we've had, which the progression the last several quarters then when you adjust for Q1, would be $0.41, $0.43, $0.45. So we should, beginning next quarter, those comparisons should be favorable in terms of current-year quarter exceeding the prior-year quarter.

Okay, that's where I was going. And so I was thinking, is that we were at that transition point now where the sequential earnings per share growth that you've been having, will now convert over to year-over-year growth also basically from this point forward.

Right.

Great. Thank you.

Your next question is from Randy Binner of FBR Capital.

Okay. Thanks. So I guess I just wanted to kind of get a better feel of the messaging we're getting on sales trends, because I guess from the model and maybe some of the C4 commentary, it just seems like there's kind of a natural, at least a deceleration of sales growth. But then of course, when I listened to Ron, he's the sales guy, it seems more bullish, and other companies are pulling back and you guys are aggressive. The pending case count is higher.

So, is there kind of a higher-level, all-in view of how we should expect sales to move forward from here? I mean you've doubled your size over the last couple of years or 2.5 years. So, just want to get a sense on kind of how much incremental growth on these comps, these difficult comps we can expect for the rest of the year.

Well, Randy, we're comfortable that the run rate we've been seeing in the second quarter is sustainable and maybe growing based on where pending counts are. The comparison to 2010 for the latter half of the year is going to be challenging because, in 2010, every single month was a new record month and sales were trending well, up above $400 million a month, by the time we got to the end of 2010.

So I would expect, relative to 2011 and the sales growth that we've seen in the second quarter, that that is sustainable. I think to see it at the same level as it was in the latter half of 2010 might be a reach.

Ron, do you have anything to add to that?

I would concur with Wendy, although being a sales guy, I am bullish on it, because I do look at the baby-boomers are getting ready to retire and need exactly what we're providing with guaranteed income and protection of principal. And they look to see the positive articles that are out there. I mean, annuities are going to be important in a lot of people's retirement plans. And so we're going to continue to wave that flag and, you know -- here we are, American Equity, we got transparent products and good service and we fit the bill quite nicely.

So I don't know where sales are going or how high they're going, but I remain very optimistic that our current trends are great, and I see them continue to move up.

That's helpful. And then one other question, on sales, I guess we had been speculating that there'd be kind of significant new entrants under the indexed annuity space. And I guess from my perspective, we haven't seen a lot. I'm just wondering if you've seen any significant new entrants into the space so far this year.

Well, we keep hearing about significant firms getting into the market, but we haven't seen anybody yet do it. So I guess we'll wait and see if they do get in. And I think we've talked about this a bit last time, in the last earnings call. If they do get in, I look at that as a positive in that it'll give our products all the more credibility that they deserve if the more -- big, big firms are now selling products that we've been selling all this time.

That's helpful. Thank you.

There are no further questions in the queue at this time. I'll now turn the call back over to Lisa McQuerrey for closing comments.

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