American Equity Investment Life Holding Co (AEL) 2013 Q2 法說會逐字稿

Welcome to the American Equity Investment Life Holding Company's second quarter 2013 conference call. At this time for opening remarks and introductions, I would like to turn the call over to Ms. Julie LaFollette, Director of Investor Relations. Please proceed, ma'am.

Good morning and welcome to American Equity Investment Life Holding Company's conference call to discuss second quarter 2013 earnings. Our earnings release and financial supplement can be found on our website at www.american-equity.com. Presenting on today's call are John Matovina, Chief Executive Officer; Ted Johnson, Chief Financial Officer; 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 John Matovina.

Thank you, Julie, and good morning, everyone. Thank you for joining us this morning. As we reported yesterday evening, operating earnings for the second quarter, excluding the $5.5 million charge for the guaranty fund assessments related to the insolvency of the Executive Life of New York came in at $35.8 million or $0.51 per diluted share and that compares to $27.4 million or $0.43 per share a year ago in the second quarter. We absorbed in the second quarter earnings a 9.5% increase in the diluted share count, which translated into about $0.05 a share in earnings and that increased dilution is coming from the convertible notes or primarily from the convertible notes, which we'll hear a little bit more about later in the call.

Relative to the first quarter 2013 operating income of $33.5 million, the second quarter was up 6.8% and that includes some incremental investment spread, offset by some higher DAC amortization and then, a slightly higher effective tax rate. And I think as you probably noticed, our GAAP net income was extraordinarily large in the second quarter, due to the derivative accounting for our index annuity business and that translated into a large increase or the large increase in book value per share and Ted's remarks will include some commentary on the factors that gave rise to the large net income number.

Our results for the quarter continue to be held back by the low interest rate environment although perhaps maybe we're starting to emerge from that environment with the activities in interest rates that have occurred since the middle of June, but the high cash balances and excess short-term investments did persist in the quarter from the previous calls of government agency securities. But as you'll hear in Ted's remarks, we made further progress this quarter in reducing that excess cash balance and the average balance outstanding in the second quarter was slightly less than the first quarter.

In our remarks 90 days ago or so, when we were talking about first quarter, we were cautious about our expectations for the second quarter because we had $678 million of government agency securities that have been called in April, but we made much more progress in reducing that excess cash balance during second quarter than we had expected 90 days ago. And so we are now expecting that we'll be in a fully invested position by the end of this quarter and I think as you might hear from Ted, we're actually pretty close already to being fully invested.

Sales for the quarter were $1.1 billion and they met the expectations that we outlined in last quarter's call of surpassing $1 billion. Those sales results contributed to a 4% increase in our assets under management and that brings us to a 14% increase over the last 12 months in the assets under management. So even though we're not on pace for the $5 billion levels of sales that we achieved in 2011, at these current level of sales which are roughly in the $4 billion range, we're continuing to grow the balance sheet in a double-digit fashion. And as usual, Ron's remarks will include commentary about sales results and the competitive environment.

So with those opening remarks, I'll turn the mic over to Ted for comments on the earnings.

Thank you, John. Investment spread for the second quarter was 2.7%. In total, invested assets at June 30 were $29.1 billion, $27.9 billion on an amortized cost basis. Invested assets will grow by an additional $105 million as we invest the excess cash balance held at the end of June. The spread result of 2.7% was 2 basis points more than the previous quarter's spread of 2.68%.

The average cash and other short-term investment balance during the second quarter was $1.7 billion compared to $1.8 billion during the first quarter and $2.7 billion during the fourth quarter of 2012. The yield on these instruments in the second quarter was 47 basis points compared to 33 basis points in the first quarter of 2013 and the fourth quarter of 2012. Partially offsetting the cost of liquidity was 4.5 basis points from prepayment income on commercial real estate mortgages, consent fees on bonds.

In addition, we had 6 basis points of benefit from overhedging in the second quarter. In comparison, we had 7.5 basis points of prepayment income and 3 basis points of benefit from overhedging in the previous quarter. The cost of money declined to 2.24% in the second quarter from 2.33% in the first quarter. This decline reflects management's actions to maintain spreads by adjusting rates to policyholders. We will make further reductions in policyholder rates as necessary to restore our investment spread to the 3% target. We have approximately 60 basis points of room to reduce fixed rates and rates on indexed annuity policies before minimum guarantees would cause spread compression. You can see the disclosure of this in the financial supplement on pages 11 and 12.

During the second quarter, we purchased $2.6 billion of new fixed income securities at an average yield of 3.48% and we funded $147 million of new commercial mortgage loans at an average yield of 4.11%. $1.5 billion of the security purchases were predominantly investment-grade corporate bonds, with an average yield of 3.36%. We also purchased $485 million of commercial mortgage-backed securities with an average yield of 3.87% and $330 million of residential mortgage-backed securities with an average yield of 3.41%.

During the second quarter, $678 million of government agency securities with a weighted average yield of 4.08% were called. At current rates and market conditions, our call exposure for the remainder of 2013 is $500 million of government agency securities that are callable in October. These securities were purchased at a premium to par as substitutes for short-term cash investments with yields of 0.72% to 0.77% through their initial call dates in July 2013. With the increases in interest rates since the middle of June, these securities were not called in July as was formally expected and now yield 3.75%. However, they are callable quarterly and a modest decline in interest rates from current levels could result in the calls being exercised on their next call date this coming October.

We also own $660 million 15 to 20-year government agency securities with coupons and book yields ranging from 2.96% to 4.28%. $36 million of these securities become callable in late September. $250 million become callable in late December 3. $324 million become callable during the first quarter of 2014 and $50 million become callable during the second quarter of 2014. However, based upon current interest rates, we do not expect these securities to be called.

Operating cost and expenses were $24.9 million for the second quarter compared to $19.5 million in the first quarter. Operating costs and expenses for the second quarter includes $8.5 million of expense for guaranty fund assessments related to the insolvency of Executive Life of New York and a credit of $3.2 million for the Stephens lawsuit. The $3.2 million credit for the Stephens lawsuit represents undistributed settlement awards due to beneficiaries that could not be located or did not come forward to claim such awards during the agreed-upon time period, which expired during the second quarter. That puts normalized operating expenses for the quarter at $19.6 million or roughly the same amount as first quarter and slightly more than the second quarter of 2012.

Book value per share excluding accumulated other comprehensive income of $18.66 is up $1.82 from the March 31 book value of $16.84. The large increase for the second quarter in book value reflects the substantial amount of reported net income for the quarter associated with indexed annuity derivatives and embedded derivatives. The indexed annuity, embedded derivative liability measurement is significantly impacted by the level of interest rates, which increased at June 30, causing this liability to decrease in value. This financial accounting volatility, which is unrelated to our core operations and management of our indexed annuity business, highlights why we exclude this activity from our operating earnings each period.

As disclosed in our quarterly financial supplements through the years, our book value per share amounts are calculated using total stockholders' equity excluding accumulated other comprehensive income and the total number of shares of -- total shares of common shares outstanding as of the reporting date. Unlike diluted EPS, there is not an established accounting protocol for determining diluted book value per share, and we have not determined the potential dilution to our reported book value per share from convertible securities and stock options. With the recent increase in our stock price, the potential reduction in book value per share from conversions of convertible securities could be meaningful.

Our RBC at June 30 was estimated at 324%, slightly down from 330% at the end of last quarter and 332% at the end of 2012. We sent out a notice of mandatory redemption for our 5.25% contingent convertible senior notes due in 2024 in late March. $25.8 million principal amount or 91% exercised their conversion rate prior to the April 30, 2013 mandatory redemption date. The holders of these notes received the principal amount in cash and 216,729 shares of American Equity common stock for the conversion premium. The $2.45 million remainder of the convertible notes was redeemed for cash of $2.5 million, which includes accrued interest through the redemption date of $0.05 million. We used Holding Company cash and a draw on our line of credit to fund our cash obligations in connection with the conversions, redemptions of these notes.

As previously announced, subsequent to the end of the quarter, we issued $400 million of 6.625% senior notes due in 2021. We used $15 million of the net proceeds from the notes issuance to repay the entire amount drawn on our bank line of credit facility and intend to use the remaining net proceeds to pay the cash consideration component of the exchange offers we intend to make in the near future to the holders of our 5.25% convertible notes due in 2029 and our 3.5% convertible notes due in 2015 depending on market conditions or other factors. The terms of these exchange offers, including the mix of cash and stock consideration to be offered to the noteholders, are still being finalized and will be available at the time the exchange offers are made.

During the second quarter, Standard & Poor's Ratings Services affirmed its BBB+ insurer financial strength rating on American Equity Investment Life Insurance Company and its BB+ counterparty credit rating for the holding company and revised the outlook on these ratings to positive from stable. In their rating commentary, S&P noted that the positive outlook reflects our improving capitalization as measured by S&P's capital model.

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

Thank you, Ted. Good morning, everyone. Before I talk about sales and marketing, I'd like to speak about the real value proposition of fixed-indexed annuities to start. You've heard us speak repeatedly about our optimism for growth in our market, and especially as the baby boomers begin to retire. Last year 2012 fixed-indexed annuity sales were $34.2 billion, which is the record year, but in the big picture, just a drop in the bucket of the financial market universe.

We continue to grow market share for our industry by promoting and educating the public and retirement planners about the merits of our products. To do this, we need to talk about the basics of principal protection, guaranteed interest, guaranteed income, and so forth. We have to stay focused on the fact that we are a safe money product, first and foremost. Our policyholders didn't lose a penny due to the financial crisis in 2008 and 2009.

It's also good though to talk about some nice index credits. Today, with the stock market at all-time highs, our policyholders are benefiting from this market environment as well. In the second quarter, the average index credit was 6.05% and the maximum index credit in the second quarter was 18.95%. I got 15% on my personal annuity.

In the first six months of this year, 81% of our policyholders got greater than 3%, 66% of them got greater than 4%, 51% of our policyholders got greater than 5%, and 35% of them got greater than 6%. 5.19% is the average index credit for the first six months of this year. So it's not too bad for a safe money vehicle.

As far as sales go, the second quarter, as John reported, we had $1.135 billion in sales compared to $930 million in the first quarter, that's a 22% increase from the first quarter. Our sales in the first six months of this year are $2.1 billion compared to $1.9 billion for the first six months of last year, that's a 10.5% increase.

We're really focused on growing the Company this year and to do so, we've introduced several new initiatives. We launched a sales promotion on April 1. We raised our minimum premium limits in April. We introduced new riders in May. We introduced another version of our current income rider in July. And we also announced a rate increase for new premiums that's effective today.

We think we're getting some decent traction from our new riders. One is a death benefit rider where the beneficiary can get the greater of the annuity contract value of 4%. However, to get the 4%, the beneficiary needs to take payments over a five-year period. Otherwise, it will be discounted if taken as a lump sum. Another one is a well-being rider. In this situation, if a policyholder cannot perform two out of six activities of daily living, we will double the income amount for a maximum of five years. And finally, we also introduced a 7% version of our standard lifetime income benefit rider. This version though has a maximum roll-up period of ten years as opposed to the 20 years on our other products.

Our pending count peaked just under 4,000 in early June. This was in part due to an adjustment of our lifetime income benefit rider interest rate and fees. Since then, it has bounced around between 3,100 and 3,300. As of today, it is 3,108. As comparison, August 1, 2012, it was 2,834.

As far as competition goes, it's been a bit of a mixed bag. In the second quarter, some of our competition made adjustments to reduce benefits, others added features or increased benefits, but the bigger trend seems to be that more a want business than those that don't. So at the end of the day, our philosophy, and as it has been from day one, is we're going to be competitive on our rates and features, but our main goal is to deliver the best service in the business is our real difference maker.

As of June 30, our agent count was at 25,300. This is the first time it's been above 25,000 since October of 2011. We contracted 1,548 agents in the first quarter and 1,880 in the second quarter. As a comparison, in the second quarter last year, we contracted 1,407.

Our Gold Eagle count through June of those that actually qualified, and just to refresh your memory, a Gold Eagle agent is that producer that writes at least $1 million in annualized premium with us. Through June, we had 461 that had already qualified. We have another 529 on track for a total of 990. Our 2012 totals at this time was 893, which is a 10.8% increase of our Gold Eagle members during the same time last year. And this is just a confirmation that our year-over-year production and our Gold Eagle count is a direct correlation.

We just finished another convention qualification period at the end of June. Our qualification period runs from July 1 through June 30. And while our Gold Eagle agents are important, our convention qualifiers are extra-exceptional producers because they need to write at least $3 million during this time period. We actually had fewer qualifiers this year, 229 compared to 266 the previous year, but our average premium per qualifier went up. It went up from $4.9 million to $5.4 million, so these are certainly some good producers for us. And while the convention destination may influence our numbers a bit from year-to-year, I think this is a good indicator that a certain number of producers who really understand our core values will produce for us regardless of our destination.

Finally, our policyholder appreciation events continue. We've had a total of 63 events with over 13,000 people in attendance. So far this year, we've had ten different events and we're averaging 221 people per event. Next week, we're in Detroit where we have 300 people in attendance and Pittsburgh where we have 200 people in attendance. We went to Pittsburgh back in 2010 when we only had 60 the first time we were there. So, I guess our message and the success of these client appreciation events is continuing to catch on and another good reason why we're going to continue to do them.

And so with that, that concludes my report, I'm going to turn it back over to John.

Thank you, Ron and Ted. Just to wrap up here, kind of a look at where we think -- see things going, outlook for the balance of the year and into 2014. With sales in the first half of the year over $2.1 billion and a good momentum heading into the third quarter, I think that positions us well for a $4 billion sales year. However, as we've commented on many occasions in the past, we're going to continue to pursue sales and market share growth, but not at the expense of acceptable profitability, and will remain disciplined in our approach to spread management and the product pricing.

On spread management, as I said earlier, the cash is pretty much now behind us and with the $500 million of securities resetting from a 0.75% rate to a 3.75% rate, we're almost in a fully invested position these days. We've still got some work to do on renewal rate adjustments to get us back up to that 3% spread, and as we'll get a lot of attention in this third quarter, and we remain confident that we've got the flexibility capabilities to get that spread back up to the target.

In terms of the balance sheet, and Ted made some comments about the senior note offering, and the fact is that that offering together with the potential retirement of the convertible debt, assuming all of the holders will end up accepting our exchange offers, significantly improves our capital structure by extending the debt maturities or refinancing obligations of those convertible note issues that we were facing in 2014 and 2015, and then eliminating any potential future dilution from those securities from a higher stock price. Now, we intend to make those exchange offers to the convertible noteholders in the near future, depending on market conditions and other factors. While the terms of those offers have not been confirmed yet, we expect them to include a combination of cash and shares of our common stock.

The two convertible note issues have a parity value or an if-converted value of approximately $509 million, that was based upon an $18 share price, and each $0.10 per share adds about another $2.8 million to parity value. In order to be successful, those offers are going to need to include a premium to that parity value as an inducement for the holders to accept the exchange offer. We've got about $400 million of cash available for the exchange offers, so any value that would need to be paid above that is going to be paid in shares of our common stock, which would not be reflected in our June 30 book value per share amount. The $400 million does include the net cash, we anticipate receiving from early termination of the call spread on our common stock that's related to the 3.5% convertible note issue, so we'll be dealing with the warrant in that call spread which represents some potential dilution. At the same time, we extinguish the convertible debt issues.

The results of second quarter and the past several quarters confirm our commitment to continue to grow American Equity. Our operating income adjusted for that guaranty fund assessment was up 19% over the year-ago quarter and has increased sequentially for each of the last three quarters. As I said earlier, our assets under management are up 14% in the last 12 months. We delivered that growth while conservatively managing our risks and financial profile, sustaining a double-digit operating return on equity and maintaining a cushion to our targeted RBC ratio.

So in our view, American Equity is very well positioned to capitalize on the growing demand for guaranteed retirement savings and income products, and we expect our invested assets and earnings to continue to grow in the periods ahead.

So with that, that concludes our prepared remarks, and we'll turn the call back over to the operator to facilitate Q&A.

Thank you. (Operator Instructions) Mark Finkelstein, Evercore.

The first place I want to go is just thinking about the rise in rates and what this means for earnings versus the attractiveness of the product and the need to constantly thinking about participation rates or cap rates, I'm trying to really understand how much of the rise in rates should we be thinking about as earnings versus sales in terms of adjusting the product offering?

Yes, rise in earnings is just one-half of -- a rise in rates is one-half of the equation, Mark. I mean we're going to be dealing with the spreads. So as one aspect of higher rates would be, we don't have to reduce crediting rates as much or perhaps don't have to reduce them as much to get back to the 3% spread. In general, rising rates, I think would probably be ahead of crediting rate adjustments once we got back to the 3% target, but that's several quarters off into the future.

Okay.

And actually, at the current rates, we're still below portfolio yield. So that means we're still kind of facing a headwind in terms of renewal rates because the product pricing typically just assumes a level interest rate scenario in that the reinvestment of the -- or the investment of the -- the investment income is done at the same rate as was assumed at the time the policy was issued. So until -- till the rate environment, say, moves back up to let's call it the 5% level, we're still investing new money and investment income at rates below the portfolio rate and actually at rates below where number of the policies were issued at.

Okay. I was actually intrigued by one of the comments that was made by Ron, which is the -- I guess, the new rider you're offering, that sounds to me a little bit like almost a long-term care rider, where you're talking about two out of six ADLs. Is this -- can you just talk about this a little bit, and is it trying to I guess attract a different buyer of the annuity?

Well, not really. It's -- I guess, the purpose of that well-being rider is to, in the sales standpoint, offer some additional peace of mind for the consumer that if they can't perform two out of those six ADLs that they can get additional liquidity from their annuity. The stop in it though is that we're going to do that only for a maximum period of five years. So it's just a -- it's a sales approach to help agents and of course, obviously help the consumers with some peace of mind that if they do end up in that situation, there is additional liquidity.

Does this product exist in the market today?

Yes.

It does, okay. Alright, thank you.

Thank you. Randy Binner, FBR Capital Markets.

[Hi], good morning. Thank you. So I want to try and ask some questions around these potential convert offerings. And I guess the first question would be, do you have a sense -- we can track kind of where the converts trade in the market, but do you have a sense of what kind of premium you would offer? Is like 5% something that will be good from an assumption perspective?

Randy, we can't really talk about that. The lawyers counsel us on the pre-offer communications and all that. So I know, in your case and other cases, you guys have got convertible desks and all that and they could probably give you some insight into that. But we shouldn't be talking about that, that level of detail on this call. I'm sorry we can't, but I think we'd be better off not to.

Do you have any sense on -- how about I'll try this, do you have any sense on timing of when you might put the tenders out and if you try to do both issues at once or one at a time?

Yes, same kind of response.

Alright, alright. (multiple speakers).

I drafted prepared remarks to give you as much as I thought we could without putting ourselves into -- putting ourselves in a position where we couldn't start the offers as promptly as possible or whatever.

I got you, no problem. So I guess then jumping over to sales, just a couple of quick ones from Ron -- for Ron, one, do you -- can you give us any color on pending counts; and two, any color you can give us on kind of the nature of the private equity kind of bad competition? $1.1 billion of sales was actually quite good relative to our expectation, given what we were hearing about [SEC ban and affine] out there. So we'll be curious to see how you're holding up so well against that very aggressive competition.

Well, they are still aggressive, that's for sure. I think from our standpoint, we're holding up quite well because of those relationships that we've built over the years. I think we get credit for our consistency in the marketplace, our good service, those types of things. The addition of these riders that I spoke about is helping and just trying to keep doing what we've been doing for a long time.

I think there are some other companies that haven't been as aggressive that maybe is helping. I think there's some uncertainty of some of the companies that are on the block to be purchased that when that happens, a lot of producers aren't really sure what their future is and so they look for another home and we're offering ourselves as an opportunity to be their next home.

Yes, actually Randy, we don't know about second quarter, but the Aviva sales were -- for Q1 were down significantly. And we kind of suspect that perhaps a lot of that went to security benefit as opposed to coming to American Equity. And of course, we don't know the second quarter sales results yet. But one of the things that we were telling people when we were marketing the debt that I think just kind of builds on Ron's comments is in 11 out of the last 12 years, American Equity has been either number two or number three in market share and I think we've got a pretty well-established position with those people who distribute for us and that's been through all kinds of market conditions, competitive environments and that. So I think we've got an awfully good foundation with the agents that we have that's serving us well.

Great, thanks. And I mean pending counts, is there any way to gauge how those are going so far this quarter, where they ended last quarter? I imagine it's above 3,000, but any color there will be helpful.

Our pending count as of today is 3,108; it's been bouncing around between the 3,100 and 3,300. Today, it's actually probably a little bit lower than it has been for a while. I think part of that is it's July. July historically isn't a big production month unless there's some major thing happening. And so I'm optimistic based on some of the things that we're doing that pending will begin to trend up again once vacation season ends and kids start going back to school and people start getting busy again. That's my hope anyway.

But that's usually pretty typical seasonality wise to see a dip like here August 1, right?

Yeah so our busy times of the year are historically in the spring, February, March, April and May and then things kind of sag a bit and then in all the middle of August into September, October, November, they pick up and then kind of slow down. So it kind of goes in waves.

Alright. I'll leave it there. Thanks.

Thank you. Mark Hughes, SunTrust.

Thank you very much. Good morning. So the growth in the agent count, is that more a function of maybe getting more mind share, more of those agents from other firms, I guess, like Aviva that are distracted. Is that the message?

Well, I probably can't give you an exact reason, Mark, that would be my assumption that there are agents looking for a home and due to our consistency in the marketplace over the years, hopefully, they're recognizing us as that home. We still -- we went through kind of a housecleaning process. Our agent count was much higher in the past and we kind of decided that we needed to trim that roster. If they're not going to write business with us, let's do each other a favor, we'll save ourselves some hard dollars in reappointment fees and we'll save them the headaches of receiving mail and email from us, and we still do continue to terminate those non-producers. But it's -- I think it's a good sign, Mark, that the agent [colors] is creeping up again.

Right. And so these would be more experienced producers that you're getting?

Well, I don't know the answer to that, for sure, if they are more experienced or not. That's a -- that would be a good exercise for me to see.

Yes. And then, just a big picture, in a rising rate environment like this, in your experience, other consumers look at your products, does their view of the attractiveness, does it evolve as rates change? More attractive? Do they start looking at other alternatives? What do you think?

I don't know that any of us sitting at this table have been in a rising rate environment, to answer you, Mark. Personally, we have, but our experiences with our index annuity policyholders, we got to go back a long way to the late 1990s, I guess. I'm not even sure then. But I think that at times when rates were higher, it makes the value proposition more attractive to people, while at the same time -- and the value proposition being, as Ron described, the protection that you get from a safe money product with guarantees, but still having the upside opportunity and those higher rates increase the ability for us to offer more attractive terms to people.

In general, we think people's attitudes towards risk are changing. For many years, the product was kind of sold for its accumulation aspects or that benefit of the indexing opportunity, but the population is aging and more and more of the conversation is about, what level of retirement income can this contract pay me over my lifetime expectancy. And so, that higher rates will provide for more lifetime income as well.

Mark, I think and just to comment -- add on what John's saying, that's why indexed annuities are such a fantastic product is that there are a safe money product. Historically, the fixed rates have been higher than CDs and other safe money products. And we should have every reason to believe that as rates go up, we can stay ahead of CDs there too. When things aren't so rosy on interest rates and the market is doing well, we have the ability to perform based on how well the S&P is doing. So, it's -- we kind of got the best of both worlds.

Right. Thank you for that.

Thank you. (Operator Instructions) And the next question is from the line of Steven Schwartz of Raymond James & Associates. Please proceed, sir.

Thank you. Hey, good morning, everybody. If I remember correctly, John, you can comment on this, 2005, going back to Mark's question, 2005 was an issue, but that wasn't so much rates going up, that was a flat yield curve, right?

Yes. It's exactly 2006, we had the flat yield curve and sales backed off then as people opted for CDs with -- I mean -- I think even in that year, the CD rates like six-month and one-year CD rates were even better than the rates that we and the rest of our competitors were offering on our index annuity product. And so, we've said through the years that flat to inverted yield curves are -- just gradually up sloping yield curves are not the best environment for sales because of the attractiveness of the CDs, so that we want to be in a normal yield curve environment, which we're certainly there today if not abnormal to our benefit in terms of the steepness of the yield curve.

Okay, good. Just making sure that. Ron mentioned that I guess new product, you've raised the cost of money. Wasn't clear to me if that was on fixed product or fixed deposits within index annuities or with regards to participation rates and caps, could you talk to that, maybe how much that was increased?

The new money rates were increased today approximately 25 basis points.

Okay. So that --

And that mean that the fixed rate is up 25 basis points on the majority of the products. The caps and participation rates, that's actually more cap adjustments and participation rate adjustments there, they're up there have been increase as well that the level of benefit would -- that they went up would translate into a 20 basis point to 25 basis point increase in the cost of the options.

Okay.

For new product sales only.

Right. And okay. So that went from -- from yesterday, it was X; today, it's 25 BPs more. What are those numbers?

125 now. Bonus Gold would be 150; Retirement Gold was 110, it's now 135; the caps are now -- on Bonus Gold, it was 2.75%; it's now 3.25%; and on Retirement Gold, it was 2.5%, now it's 3%. And as John said, that increase in the caps, that's reflective of a cost of option that's 25 basis points, equal to what we increased the fixed rates.

Okay. So all told, the cost on one year is about 125 to 150, somewhere in that range. And then, so far through July, maybe you could talk about what kind of rates you're getting on new money being invested?

I don't have a report that tells me that.

Okay. Well, I guess what I'm getting at John is, are we seeing a 300 BPs on a new sale today?

Yes, we expect we're getting the 300 BPs, yes.

Okay, that's where --

And the way we get there, I think we've said this before, though, is the -- there is an element of the portfolio yield that we're allocating to new money in effect where the policy surrenders and lapses or partial withdrawals. We look at -- in terms of our rate setting, we look at funding those out of the new premium cash flow, which reallocates then some of the portfolio yield to new money yield. Of course, if we were perfectly matched in our cash flow, as you couldn't do that, say, because you would have -- for every dollar of redemption of money, you would have a maturing investment, but it's not that precise and in the big picture then, that's the way we look at it, but we also then have to be mindful of where the spread is overall, because that -- some of those investments may be -- we may have maturing investments and don't get the benefit of the portfolio yield.

Okay. And I have a couple of other things. How much cash -- I guess total cash money coming in for maturity sales, stuff that you took out of short-term as you got invested, how much cash did you just put to work this quarter?

Well, we ended the end of June at $816 million.

No, he is asking. No, it's $2.6 billion.

$2.6 billion.

That was invested, that is from your script is what he was asking.

Okay, I missed that. And then, one other, if I may. Ted, assuming you're successful with regards to the exchange offers for the two converts, how much of the dilution is -- will be wiped out, with the understanding that there's going to be shares issued to partially offset that? So I think the total dilution was something north of 6 million shares.

The diluted shares in Q2 number were --

Diluted shares in the Q2 number for the 2029 were 5 million shares.

And for the other?

There is no dilution on the other because of the call spread that's in place. For accounting purposes, there is no dilution for that.

Okay.

And there was no dilution from the warrants in Q2, but that was because of the stock price was 16 or just under 16 was the price used to measure dilution on the warrants and the strike on the warrants was 15.8. So at current levels of stock price, the warrants are dilutive as well, but they just -- and would have a dilutive effect in Q3 earnings if they're still outstanding at the end of this quarter.

Yes. I was thinking about the warrants as the other one. Okay. That's what I had. Thanks, everybody.

Thank you. Next question is from Ed Shields of Sandler O'Neill. Please go ahead, sir.

Hey, good morning, everyone. This is kind of a follow-up to Steven's question just a second ago. In relationship with the new money versus portfolio yield and the reallocation, John, you had mentioned that the minimum guaranteed withdrawal benefit, when people utilize that, that's where part of that shift comes from. I'm just wondering if with the recent rate -- rise in rates really since the end of the quarter or very late in the quarter, if there has been any tick up in policyholder utilization of that 10% withdrawal rate.

I don't know. Subsequent to the quarter, we don't have -- I mean, I'm sure there's reports internally where obviously we write checks each day and all that, but we don't have an assessment or a quantification of whether there's been any upticks and --

My guide is that there hasn't been. I look at daily check. I mean there is -- every so often, I'm signing checks that go out; every day, I'm looking at those. I think it's too early yet to see a change in policyholder behavior. We will probably have -- obviously have a better idea as we get through the third quarter and into the fourth quarter to see whether policyholder behavior has changed and whether they have increased their utilization of the 10% free partial withdrawal or some other level of surrender.

Yes. There's still a lot of business, in-force business, Ed, that's sitting at rates that are well above the -- even the 25 basis points that we just increased rates. So, those older policies are going to keep -- they're going to keep the money with us because the rate they are getting is 3, 2.75 or so, maybe, maybe as low as 2.50 versus a 1.5 on a new money today.

Right. Got it. That's it from me. Thank you.

Thank you. The next question is from the line of Mark Hughes of SunTrust. Please go ahead.

Yes. Thank you. John, you had sort of alluded to the several quarters in the future and I think you were talking about getting to 300 basis point spread again. Could you maybe, I don't know if you can sharpen that up a little bit, what has to happen and how long will it take to get back to 300 basis points?

Well, we've got to make some fairly large broad-based adjustments to renewal crediting rates, which on the last call I expected we would have those in process at the time of this call, and I guess I'd say with the time and effort we devoted to the bond offering, that one did not move at the pace that I anticipated. So, once those -- that rate adjustment kicks in, it will take a full 12 months for the full benefit to be realized because the way rate adjustments happen is they will establish the terms, but they occur on the individual anniversaries, which obviously would then be -- would occur over a 12-month period.

Right. Will that be harder, will your policyholders be a little surprised given that rates are moving up and that's what they'll be thinking about and then, they'll see the crediting rates coming down?

I don't necessarily think so. We're still talking about people that have current rates of in many cases, north of 3%. But it is going to be a little bit different circumstance as you point out that the direction of new money rates is slightly up and the renewal rate adjustment is opposite. But one of the things we've said many times in the past too is that the -- competitive wise, we operate in a very open environment in terms of where everybody knows what everybody else is doing on new money, but the renewal rate adjustments are not -- they are not evident at all or you can't -- other than anecdotally, or if you have a policy with American Equity, and one of our competitors, you might be able to see what's happening to renewal rates from the separate companies. But there is not -- the breadth of data that you have available on new money rates to see what's going.

Yes. I mean not that many people have the tenure on their screen.

Yes.

Okay. Thank you very much.

Thank you, sir. You have no further questions in the queue. I will now turn the call back to Ms. Julie LaFollette for closing remarks.

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

Thank you, ladies and gentlemen, for your participation in today's call. You may now disconnect and enjoy your day. Thank you.