American Equity Investment Life Holding Co (AEL) 2013 Q3 法說會逐字稿

Welcome to American Equity Investment Life Holding Company's third-quarter 2013 conference call.

At this time, the opening remarks and introductions, I would like to turn the call over to Julie LaFollette, Director of Investor Relations. Please proceed.

Good morning and welcome to American Equity Investment Life Holding Company's conference call to discuss third-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 thanks to each of you for joining us on the call this morning.

Before we get into results, I'd like to let you know that not only did the Company have a great quarter, but our policyholders did as well. Our index annuity policyholders participated in stock market advance with no risk to their fund value. The average index credit earned by our policyholders in the quarter was 5.8% and the highest was over 18%.

So meeting the needs of our policyholders by offering upside participation at low risk is one of the reasons American Equity has been so successful over the years. And this value proposition still drives our business today. Ron will have some additional details on policyholders results, so now let me discuss the strong results we produced for our stockholders this quarter.

Our normalized operating earnings per share, and that is excluding the impact of the non-trendable DAC unlocking, grew almost 22% year over year. And if we adjust last quarter's earnings for that Executive Life of New York guaranty fund assessment charge, we've now had four consecutive quarters of sequential increases in operating earnings.

For the quarter, we generated operating earnings of $0.50 per share before the DAC unlocking benefit. This was a solid performance, considering our higher stock price contributed to a 6% increase in our diluted share count. And those earnings represent a return on average equity of 11.8% for the trailing 12 months.

Our spread performance continues to improve, reaching 2.8% this quarter. As we expected, we fully deployed the excess cash and short term investments balance that was pulling down the yield in our portfolio and are fully invested at the end of the quarter and today. The rally in interest rates this last quarter has certainly been beneficial to us, but we're also continuing to stay focused on the crediting side of the spread equation and have flexibility for more action there as well.

Our attractive product attributes and excellent customer service culture, both to our distribution partners and our policyholders, enabled us to exceed $1 billion in sales again this quarter. While we do not intend to pursue sales in market share growth at the expense of acceptable profits, we would like to sustain and grow our quarterly sales levels, which is important as our asset base grows. Sales should grow naturally due to the nature of our product and how well it fits with an aging US population that needs principal protection but upside opportunity for their retirement savings dollars. As usual, Ron's remarks will include commentary about sales results in the competitive environment.

And then finally we took some actions this quarter to simplify and improve our capital structure. In July, we issued $400 million of eight year notes. The proceeds from that issuance are ear marked to retire our outstanding convertible debt issues and about one-third of the outstanding convertible notes were retired last month to exchange offers. When I come back at the end of the call, I'll have more to say about plans to retire the convertible notes that remain outstanding.

With that, let me turn the call over to Ted, who can fill you in on more details on the operating results for the quarter.

Thank you, John.

Our third-quarter operating income was $59.8 million, or $0.80 per diluted share, including the effects from unlocking during the quarter, compared to $22.2 million or $0.34 per diluted share for the third quarter of 2012. The results include a 14.2% increase in diluted shares for the quarter, compared to the third quarter of 2012, due to the increase in our stock price, which equates to $0.11 per share.

Excluding the impact from unlocking, operating income was $37.4 million, or $0.50 per diluted share, compared to $27.1 million or $0.41 per diluted share in the third quarter of 2012. Unlocking includes revisions to assumptions for DAC and deferred sales inducement amortization and similar revisions to assumptions used in determining the liability for future benefits to be paid under lifetime income benefit riders. We also modified assumptions used to determine the indexed annuity embedded derivative liability to be consistent with the changes we made in unlocking, but the outcome of those changes only affect reported net income and not operating income.

Normalized third-quarter operating income of $37.4 million, or $0.50 per diluted share, compared to second-quarter operating income excluding the affects of the guaranty fund assessments for Executive Life of New York, was $35.8 million, or $0.5 1 per diluted share. A 5.9% increase in diluted share count for the third quarter is what caused our diluted per share amount to be lower than the second quarter.

Investment spread for the third quarter was 280 basis points and total invested assets at September 30 were $29.8 billion. Our spread result of 280 basis points was 10 basis points more than the previous quarter's spread of 270 basis points. As John commented, we met our expectation of eliminating our excess cash and short term investment balances and achieved a fully invested position during the quarter. We did not have any excess cash or short term investments at the end of the quarter.

The average cash and other short term investment balance during the third quarter was $341 million, compared to $1.7 billion during the second quarter. Partially offsetting the cost of liquidity was 5 basis points from prepayment income on commercial real estate mortgages and consent fees on bonds. And in addition, we had 3 basis points of benefit from over-hedging in the third quarter.

Our cost of money declined to 2.22% in the third quarter from 2.24% in the second 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.

During the third quarter, we purchased $1.5 billion of new fixed income securities at an average yield of 4.38%, and we funded $170 million of new commercial mortgage loans at an average yield of 4.24%. The majority, $979 million of the security purchases, were predominately investment-grade corporate bonds with an average yield of 4.32%. We also purchased $335 million of commercial mortgage-backed securities with an average yield of 4.7% during the quarter.

During the third quarter, we had no calls of government agency securities. At current rates and market conditions, our call exposure for future periods is limited to $500 million of government agency securities maturing in January 2028 with 3.75% coupons. These securities are callable quarterly and a modest decline in interest rates from current levels could result in the calls being exercised on their next call dates, which is January 2014.

We also own $660 million of 15- to 20-year government agency securities that become callable at various times in the next three quarters. However, based upon current interest rates, we do not expect these securities to be called. Now with our total call exposure down to less than $1.2 billion, we believe any future calls would be manageable and could be dealt with fairly promptly.

Interest expense for notes payable was $13 million, compared to $6.8 million in the second quarter of 2013. The larger expense is due to the issuance of the $400 million 6 5/8% senior notes in July 2013. In October 2013, we used $128 million of the net proceeds from the notes issuance to retire $102 million of aggregate principal amount of convertible notes. Interest expense will decline in the fourth quarter, due to the retirement of the $102 million principal amount of convertible notes in October, but will continue to remain at higher levels than recent quarters until such time additional convertible notes are redeemed or repurchased.

Operating costs and expenses were $20.7 million for the third quarter, compared to $24.9 million in the second quarter and $19.5 million in the first quarter. As we reported last quarter, operating costs and expenses for the second quarter included $8.5 million expense for the guaranty fund assessment related to the insolvency of Executive Life of New York and a credit of $3.2 million for the Stevens lawsuit. That puts normalized operating expenses for the third quarter about $1.1 million more than the second quarter operating expenses of $19.6 million. This increase in operating expense is primarily due to the increase in our stock price, which affected the amount of expense recognized for certain compensation items tied to the fair value of our common stock.

Page 8 of our September 30 financial supplement includes a pro forma capitalization table and certain other pro forma information related to the exchange offers for our convertible notes that were completed last month. In addition to the $128 million of cash I mentioned earlier, the consideration paid to the exchanging note holders included 3.1 million shares of our common stock. On a pro forma basis, our September 30 book value per share was $18.38, compared to $18.66 at June 30. As I commented in last quarter's earnings call, unlike diluted earnings per share, there is not an established accounting protocol for determining diluted book value per share, and the book value per share numbers we report do not include any potential dilution from convertible securities and stock options.

We estimate that the exchange offers and related early termination of a portion of the call spread tied to one of the convertible note issues reduced our book value per share by $1.19. With the recent strength in our stock price, potential further reduction in book value per share from conversions or retirements of our convertible notes could be meaningful. Our RBC at September 30 was estimated at 333%, up from 324% at the end of last quarter and 332% at the end of 2012.

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

Thank you, Ted. Good morning, everyone.

We had a great quarter in so many respects, and, as John pointed out, our policyholders had a good quarter as well, with the average index credit in the third quarter of 5.77% and the maximum index credit for any one strategy was 18.16%. And this extends the streak of better-than-average quarterly index credits to five quarters.

In the first nine months of this year, the average index credit was 5.39% and the maximum credit was just shy of 19%. Approximately 39% of the index credits posted in the first nine months exceeded 6%, 71% exceeded 4%, and 85% of the index credits posted exceeded 3%. These are fantastic results considering our first priority as principal protection and guarantees, and when compared to other safe money products like certificates of deposits, money markets, bonds. To get an average index credit over 5% with the strong guarantees of our FIAs is a great story.

Sales for the third quarter were $1.05 billion, compared to $1.13 billion in the second quarter of this year. Sales were up, however, over the third quarter of 2012 of $981 million. This is the first time we've seen back-to-back billion dollar quarters since the fourth quarter of 2011 and the first quarter of 2012.

Sales are up 8.4% for the first nine months of this year compared to the first nine months of last year. Our pending count averaged around 3,150 during the third quarter and remained in a pretty tight range from the low 3,000s to the high 3,100s. Today our pending count is 3,124.

Our competitors have not announced third-quarter numbers yet, so we don't know exactly where we stand. However, the fixed indexed annuity market is increasing and our market share is also increasing. Through the second quarter of this year our FIA market share was 11.54%, up from 10.52% last year. It seems the competition is a little hungrier though this year for business, as they've introduced some new index crediting strategies, as well as increased some premium bonuses and have run some commission incentives.

American Equity has not had a commission incentive since the spring of 2011, so to stimulate our own sales and combat some of the other companies' incentives, we did introduce our own six week commission incentive where producers can earn an additional 50 basis point commission up to a 1% commission bonus, depending on sales volume. This should help us continue our momentum for a third consecutive billion dollar quarter.

Eagle Life is also making significant progress. We've hired a new wholesaling firm who has a national footprint and works mainly with broker-dealers. We also have two new wholesaling firms that focus on bank distribution.

While the bank channel has been know more for multi-year guaranteed annuities, fixed index annuities are catching on and in some cases fixed index annuity sales exceed those of the multi-year variety. We're finding, however, that these distribution channels require a lot more patience on our part than the traditional independent agent channel. There is much more product and company due diligence and the process is done by committee. We definitely feel, though, that Eagle Life is on the right track and we look for respectable sales results in the first quarter of 2014.

As of the end of October, American Equity has 986 Gold Eagle members who have qualified or on time to qualify by year end. This number is up from 881 a year ago. To refresh your memory, Gold Eagle members are those that produce at least $1 million of paid annuity premium during the calendar year.

Historically, these producers have been responsible for approximately 57% to 58% of our total production. So we certainly want to pay extra special attention to these producers. As the Gold Eagle count goes, so goes production.

We will be attending our agents' convention this week where we will have our very best Gold Eagle members. To qualify for our convention, producers need to write a minimum of $3 million in paid annuity premium between July 1 and June 30 of the following year. This year we will have 202 producers in attendance responsible for $989 million in sales. That's an average of $4.9 million per producer, which is outstanding. So you can count on us to be very appreciative over the next few days with these outstanding producers.

We often get the question of why sell for American Equity when there are larger, older companies with more products in our distribution channel. I think you need to start with the fact that our senior leadership team has been together for an average of 15 years. Some of us have been together for over 20 and yet others over 30. We know how to work together and we know how to run an insurance company.

Consider that Dave Noble formed this Company from scratch in 1995 and since we've navigated through the economic downturns of 2001 and 2008 and all-time low interest rates to become a $38 billion company.

Our cornerstone is what we will offer as the best customer service in the industry. We have to have competitive products, rates and commissions, of course, but the competition can always beat you in rates and commissions. Excellent service is a culture and it can't be duplicated, at least not over the short term.

And I'm so proud of our home office team. They genuinely want to do a good job for our producers and our policyholders and it's really the basic stuff, like issuing policies, withdrawal checks, paying commissions all on time in an accurate fashion. And of course our phones are answered by a live person in our west Des Moines office within one minute of connecting with the switchboard. I received a text the other day from one of our Gold Eagle producers. He said, every once in a while I send a piece of business to one of your competitors, and every time I do, I regret it.

Finally, a great example of American Equity's culture is our client appreciation events. We started doing these events in 2010. We felt our policyholders were entitled to hear directly from us and have some reassurance that their money was safe and that the Company was rock solid financially.

We give a one-hour presentation about American Equity's culture and financials and then we recap some of the ABCs, 1-2-3s of fixed annuities. We serve a nice buffet lunch, give away some door prizes, pay tribute to our veterans and send them on their way and we don't sell them a darn thing other than ourselves.

Every time we hold an event, the people leave very satisfied that their money is in a good place. We know this because they tell us. They tell us at the events and through the many cards and e-mails we receive after the event. It's very gratifying and humbling experience.

So far we've had 70 events around the country hosting nearly 14,000 policyholders and 874 Gold Eagle agents. And for every policyholder that has attended, I'll bet they've told another three to five people about their experience. And so far not a single competitor has followed our lead.

So with that, I'll turn it over to John.

Thank you, Ron.

Briefly summarizing, giving you a little thoughts about -- our thoughts about the future. Certainly with sales of $3.1 billion for the first nine months and some momentum heading into the fourth quarter, that positions us for a $4 billion year. But, however, as I said in my opening remarks, we are going to be mindful of our profitability and, as has always been the philosophy at American Equity, we will not pursue sales and market share growth at the expense of acceptable profits. We remain committed to disciplined approach to spread management and product pricing and are going to continue to work on the liability side of the spread equation to make some further rate adjustments with the goal of moving that 2.8% third-quarter spread back up to the target of 3%.

In terms of our balance sheet, the $400 million proceeds from our senior note offering, we've got about $270 million of cash left that's available for further retirement of our convertible notes, and it's our objective to redeem or repurchase the $214 million that still remain outstanding. The form and timing of any such activity is going to be dependent upon market conditions and other factors, and there could be no assurance that we'll be able to complete any transactions prior to the call date for the 5 1/4 notes, which is December of next year or the maturity for the 3 1/2% notes which is September of 2015.

We did have a period following the closing of the exchange offer where we were not free to entertain any discussions with any holders, but that period is now expired. And so I think over the course of the next several days or weeks we will be having some conversations with holders of the -- that still hold the notes with the objective of entering into private transactions with those entities and further retiring some additional portion of the notes. And beyond that, we'll be playing it by ear, I guess, so to speak, following whatever success we might have there as to what course of action follows then to get the balance of the notes in.

The results for Q3 and the past several quarters confirm our commitment to grow American Equity. Our operating income per share, exclusive of the impact of the unlocking, grew almost 22% over the year-ago quarter. Our assets under management are up 14% for the trailing 12 months. We've delivered this growth while conservatively managing our risk and financial profile, sustaining a double-digit operating return on equity and maintaining a cushion to our targeted RBC ratio.

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

With that, operator, we would be happy to talk any questions from the callers.

(Operator Instructions)

Randy Binner, FBR Capital Markets.

Thank you. I'm going to try and ask a question on the next version of the tender. And I guess I would say, you have the $270 million in cash that John identified at the holding company, so that would be seemingly more than enough to kind of cash settle these converts. But you know, the structure of the previous convert tender had a combination of cash and stock. And so I guess my question is should we assume that, you know, you would have a similar structure of kind of cash and share settlement if you're able to negotiate a tender for these converts going forward?

Yes you should, Randy. The parity value of those converts based upon yesterday's price, not this morning's, was $393 million. So with $270 million of cash, you know, we were going to be short $123 million. And in addition to that, you know, in addition to parity value, the holders would be expecting some sort of inducement premium to tender early. So you know, it'd be even a little bit higher than that. So, yes, any transactions are going to likely involve a combination of cash and shares.

Okay, perfect. That's exactly what I was looking for. Then on like all that cash that's sitting at the holding company, is there anything you can do with it investment-wise in the meantime?

Unlikely, no. Short term rates, but the money is earmarked for the retirement of the convertible debt. I suppose if we got through a portion of next year and reached the conclusion that whatever we were unable to retire between now and then was not going to be feasible to get in before either put or call date or maturity date. We might look at targeting something that had a maturity that coincided with those, but I don't see us taking any kind of interest rate risk on those funds. So the best move is to eliminate the debt.

Understood. And then just one quick one, if I could. I think that the investment income result in the quarter benefited from the use of fund repo going forward a little bit on the portfolio, which I think is something that you did a long time ago and have started doing again recently. Is there any way to give us color on how we should think about modeling for that or assuming kind of the additional benefit of that going forward?

What's the balance today?

$148 million. Around $148 million.

The previous program that we had targeted typically one to two months of sales in repo. In effect a forward purchase of investments to back the annuity liabilities. So that when -- as we started having the credit interest to the policyholders, we already had a permanent-type investment to support that. So from what I understand our repo balance now is about $148 million. I can see an average of $150 million to $300 million as being something that we would look at operationally for now.

Okay. So more like I guess not even a month's forward sales? Relative deal --

Right.

Okay. I'm sure the other guys have stuff. I'll drop back in the queue. Thank you.

Steven Schwartz, Raymond James & Associates.

Good morning, guys. On Eagle, a couple of things. Were there any new agreements signed in the quarter? Or since quarter-to-date in the fourth quarter, if you're allowed to mention that?

We did get four new selling agreements in-house during the quarter. And we have multiple additional selling agreements, which we have commitments but no signed documents yet. So we're making good progress there.

That is good. Ron, I think you mentioned you hired wholesalers. I think that was the word, hired, that you used. Is this process somehow different than dealing with the NMOs that typically go to your individuals?

Well it is a little bit different, Steven, in that we do call them wholesalers. They're independent. But we won't have 60 of them. We'll probably have as many as we have, which is we have the one with the national footprint, we have the two that look at banks and we have another one that we're looking at. So I don't expect us to really expand beyond four or five wholesalers.

And I've learned that the dynamics are a little bit different on this side of the house in that the wholesalers really try to work for the Company and focus on a company or two. Where on the other side, the independent channel, they got 15, 20 companies they're trying to promote. So it is a little bit more focused on the Eagle side, which has been different for me.

This is all commission-based as well?

Yes.

Okay. And then Ted or John, the cost of money came down a couple of BPs in the quarter, you're at 280. You know, a couple of BPs a quarter is really going to get you to 300 -- certainly not 300 for the year, for next year. Do you have anything immediately planned that maybe you could share?

We've got activity ongoing to analyze that, but nothing to -- nothing specific to announce at this point. There has been an ongoing modest reduction of some certain policies that haven't been adjusted yet. And that's going to be -- that's going to extend into policies that were issued in, I think it's January of 2011.

So right now it's been catching policies issued through 2010. But there needs to be another one that is being examined to go back and make some incremental adjustments on policies that have already been reduced once over the course of the last several years.

I know you don't give guidance, not interested in giving guidance, but is the target here to get 300 for the year or just to get back to 300 in 2014?

It's to get back to 300 in 2014.

Okay, great. Thank you, guys.

Mark Finkelstein, Evercore.

Good morning. Maybe just following up on Steven's question, I guess. And I had a similar thought. Where we sit today do you feel more or less confident about achieving a 300-basis point target in 2014?

Relative to last quarter?

Yes.

I'd say it's probably neutral. I felt confident about it last quarter, I feel confident about it this quarter, too.

What would have to happen for you to not achieve that 300 basis points? What in the macro or what in your own decision making?

We'd have to decide not to make any further reductions in renewal crediting rates.

Okay. Maybe just moving on then. The -- just in thinking about the tender a little bit and maybe I'll ask the question this way. Obviously you've had a little bit of time where a number of people didn't participate. They've presumably made inbound phone calls to you. You have not been able to respond necessarily. But in terms of thinking about the inbound calls that you've received, is there any way of framing out how much of the remaining untendered securities that represents?

You know, we -- I mean, I can think of a couple holders. One has a position of like $20 million, another one has a position of $25 million and one's $13 million or $14 million.

I mean, do you feel fairly confident that if we were to look here six months from now that a good percentage of the untendered securities would be dealt with?

I wouldn't necessarily want to speculate on that. Until we get, you know, until we get into an actual negotiation with somebody and get a deal cut, things sound encouraging now, Mark, but we don't have any negotiations. We don't know how they're going to go and the holders may want to price more than we want -- we're willing to pay. And I hope that's not the case. I hope we have success with the three large positions I just indicated we're aware of, and more on that, too. But I really wouldn't want to speculate on how that might turn out or where we might be.

Okay. And then just one final question. In terms of the restructured reinsurance treaty that added some RBC points this quarter, are there any earnings implications going forward in this new treaty that we should be thinking about?

That's going to add about $940,000 of expense each quarter. So you have an additional $75 million and the effective cost of capital on that treaty is 5%.

Pre-tax.

Pre-tax.

Pre-tax. Got it. Okay, thank you, guys.

Mark Hughes, SunTrust.

Thank you very much. Ron, in terms of your sales momentum, say, through the quarter, was it steady? Did it pick up? You had the interest rates moving up earlier in the year but it kind of stabilized here. Has that had a discernible impact on your sales volume?

It's actually been pretty steady, Mark, over the third quarter. September was down a bit as -- or I should say August was down a bit, as August usually is as agents go on vacation. But we did have a good rebound in September. But overall the quarter was pretty steady.

Did you give the number for contracts outstanding?

You mean the pending count?

Yes.

I did and that was 3,124. And the window during the quarter ranged from the low 3,000s to the high 3,100s. So it's been in that range the whole quarter.

How do you think your market share -- you've sort of alluded to this, but how do you think your market share held up in Q3?

That's a good question. When the second quarter came about I thought we did all right, and then when the competitors announced their numbers I was very, very pleased in that our market share actually increased. A lot of our competitors have been running some commission specials and trying to grab market share away from us, so we held our own as the pending count and production indicates. So it will be interesting to see how everybody else did.

Yes. And then I was -- the new commission structure, the new initiative you got in place to boost sales, could you give that just one more time? And to the extent that you've done that in the past, how meaningful has it been for your results?

Well, the commission bonus is I believe -- I don't have the exact statistics in front of me, I but I think they had to do $300,000 to $350,000, somewhere this that range to get the 50 basis point bonus. If they did $750,000, they got a 75% bonus and if they did $1 million or more they got 100 basis points on that premium. And it's for applications that we receive in about a six-week window and then we give them until the end of December for those transfers and 1035 exchanges to get funded. When we've done them in the past we've always had a nice shot in the arm from sales. So we're hoping for the same results here.

Thank you.

(Operator Instructions)

Ed Shields, Sandler O'Neill.

I think I've got a follow-up question for Ron here on the competitive environment. You've given some nice information here, but I was just wondering if there's any sign of new entrants or maybe some of the legacy players getting more proactive versus the dormant -- the little bit of weakness they had in some prior quarters with the things involving them? Any update there could be useful.

Well, we still see the private equity-owned companies being very aggressive. They haven't seemed to back off at all. A couple of our core competitors that we've competed with for years and years, Allianz and Aviva/the new Athene, Allianz has -- their market share is going down but they've also seemed to be more aggressive as well in that they raised some of their premium bonuses and ran their own commission special.

Aviva/Athene is down quite a bit this year. We haven't seen what their third quarter numbers look like. And since Athene is the new owner we haven't seen any major announcements or any major marketing programs get introduced. So we're not sure how aggressive they're going to be the balance of the year.

There's a number of what I call in and outers, where they get in the market, make a splash and then they get out. I haven't really seen much of that, either. There's just been -- private equity has probably been the dominant force as far as competitors.

So basically nobody's been entering the market new? I remember a while ago there were a couple of potential new entrants, maybe a year ago, kind of waiting in the wings, but they hadn't actually started sales.

No, there's nobody that comes to mind. I can't think of anybody that pops up at the moment.

Okay, great. Another question here, I know I've asked this before on the pre-payment income. If I do my math right, it's about $3.5 million in the quarter, the five BPs. Should we expect that to remain flat going forward or is there any expectation for that to taper off with the interest rate environment being what it is?

Ed, I'm not sure how to answer you there. Through the course of the last number of quarters there's been some variability that you can't necessarily explain. So sometimes you get some commercial mortgages teed up for refinance and you know, so I'm not sure it's necessarily predictable.

Okay, fair enough. And I'll just finish with one last one here. Can you talk about any conversations you've been having with the rating agencies and how that -- any dialogue there has been going forward?

We have had a quarterly or our annual meeting with A.M. Best, the face-to-face management meeting. There were no surprises in that meeting. I think Best has announced their rating actions on us the last several years. It's actually spilled over from a timing of a fourth quarter meeting until sometime in the first quarter. But they indicated they might be getting that moved up this year. So perhaps we'll have a rating announcement from them before the end of the year. I guess I would be surprised if there was any movement one way or another and I'm certainly not expecting anything to the downside from them, given the financial performance and the fact that we continue to maintain good market share, leadership in the marketplace and good profitability and capital adequacy.

I know they always are, you know, have a strike against us because of the monoline nature of our company and the fact that their evaluation of insurance products, they put, say, whole life as the safest or highest rated product. They have fixed index annuities kind of toward the middle, actually a little bit slightly to the right in terms of what their view is, so you know, I think perhaps if our line of business was 100% whole life as opposed to 100% fixed index annuity, we might have a higher rating from them. But given the nature of our products and where their views are on it, I think the rating is likely to stay where it is.

And of course S&P, we're on a favorable outlook or positive outlook from them, but that was announced in the summer. I really wouldn't anticipate -- the next rating activity from them comes sometime next summer.

Great. Thank you.

Steven Schwartz, Raymond James & Associates.

Thank you. Hey, guys, just a quick follow-up. Did you mention, John, kind of what you've been doing on the investment side, the new money rate on the investment side so far through this quarter?

No, we didn't. Would you like us to? (laughter)

I would really appreciate that.

Jeff's here in the room. I'll let him talk about securities. I'll make a couple comments, first about the commercial mortgages, which I think that funding rate was 4.20%, Ted, in the first -- 4.24%. I know the rates, the loans we've been seeing in committee over the last number of weeks, which would, you know, probably not very many of those funded in the third quarter, so they'll fund in the fourth quarter, were at rates higher than that. And I'm not sure we've approved anything recently below a, say, a 4.70%-ish to 4.80%-ish range and actually had some above 5%. So we are going to see a higher rate on commercial mortgage loans. I guess where those rates were at, they're actually a little bit lower now than when we were approving at 5%, so they backed up a little bit, commensurate with the back-up in the 10-year treasury. And Jeff, talk about securities for October?

In general, the securities for the third quarter were --

Fourth quarter.

Okay, all right. Was 4.38%. A good portion, about 60%, which is what we allocate to corporates, was in corporate purchases. The remainder were in CMBS, an area that we've been adding exposure to, some municipals, some RMBS agencies trying to stay diversified in each of the sectors, not trying to get too overweighted in any one sector.

Okay. So it sounds like new money in October is 4.70%, 4.80% all in?

That might be on the high side.

Probably on the high side. Probably more 4.40%-ish.

4.50%.

4.50%? Okay, great. Thanks, guys.

Thank you. Ladies and gentlemen, I would now like to turn the call over to Julie LaFollette for closing remarks.

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

Ladies and gentlemen, that concludes your presentation. You may now disconnect. Thank you for joining and good day.