American Equity Investment Life Holding Co (AEL) 2013 Q4 法說會逐字稿

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

Good morning and welcome to American Equity Investment Life Holdings conference call to discuss fourth-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 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. Is now my pleasure to introduce John Matovina.

Thank you Julie, and good morning everyone. Before I discuss results I want to let you know that not only did the Company have another great quarter and great year, but our policyholders did as well.

Our index annuity policyholders participated in the stock market advance with no risk to their fund value. During the fourth quarter the average index credit earned by our policyholders who had a policy anniversary in the fourth quarter was 6.57%, and for all of 2013 the policyholders average credit was 5.73%.

The highest credit was in the fourth quarter at 22%. So not bad results for not taking any risk of loss of principal on a fixed index annuity.

So meeting the needs of 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 policyholder results, so now let me discuss the strong results we produced for our stockholders.

For the quarter our operating earnings were $39.8 million, up almost 29% year over year, and that translated into $0.50 per share for the quarter. This is a very solid performance considering our higher stock price contributed to a 6% increase in our diluted share count, compared to the third quarter at 20% increase in our diluted share count compared to fourth quarter 2012. Our 2013 full year operating earnings represent a return on average equity of almost 14%, or 12% if you exclude the unlocking benefit we discussed in the third quarter call.

During the quarter we paid out our annual cash dividend, the amount was $0.18 per share. That was a 20% increase from the prior year and marks the 15th consecutive year American Equity has paid a cash dividend. We have increased our annual cash dividend for the last 10 years.

Our spread results for the quarter did regress by 7 basis points. Ted will discuss the details in his remarks including the variance in our hedging results. We do remain confident in our hedging process, which has proven highly effective through the years and typically results in a plus or minus 1% or 2% over that period of time.

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. As we've said repeatedly in the past, while we do not intend to pursue sales in market share growth at the expense of acceptable profits, we do want to sustain and grow our quarterly sales levels.

While 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 the retirement savings dollars, we intend to maintain an active presence in the marketplace. As usual, Ron's remarks will include commentary about sales results in the competitive environment.

Finally, we deployed a portion of the proceeds from our $400 million senior note offering from last July and retired almost one half of our outstanding convertible debt. Ted will have additional details on the financial outcome of the convertible debt retirements and our plans to retire the balance of the convertible notes. So with that let me turn the call over to Ted for comments on operating results.

Thank you, John. Our fourth quarter operating income was $39.8 million or $0.50 per diluted share compared to $30.9 million or $0.47 per diluted share for the fourth quarter of 2012. The results include a 19.9% incorporated recent diluted share count which equates to $0.10 per share. The increase was due to shares issued during the year for retirement of convertible notes and exercise of stock options.

In addition, there was greater dilution from convertible notes, warrants and stock options outstanding due to the Company's common stock being at a much higher price in the fourth quarter, 2012 compared to the fourth quarter of 2013 compared the fourth quarter of 2012. Fourth-quarter operating income increased 6% compared to the third-quarter operating income, excluding the effects of unlocking a $37.4 million or $0.50 per diluted share.

Investment spread for the force quarter was 273 basis points and total investment assets at the end of the year were $30.3 billion, $29.6 billion on an amortized cost basis. Our spread results at 273 basis points was 7 basis points lower than the previous quarter spread of 280 basis points. Spread performance was impacted by average yield on investments which declined 5 basis points when compared to the third quarter, due to investment of new premiums and portfolio cash flows at rates below the portfolio rate.

The average yield on invested assets was 4.97% for the fourth quarter. While the average yield on fixed income securities purchased and commercial mortgage loans funded was 4.48%.

The aggregate cost of money for annuity liabilities was 2.24% in the fourth quarter, compared to 2.22% in the third quarter. Although the Company continued to reduce its cost of money through lowering crediting rates, progress in the fourth quarter was offset by hedging results.

The 2 basis point increase and the aggregate cost of money was directly attributable to hedging results. We were 3 basis points under hedged in the fourth quarter, and 3 basis points over hedged in the third quarter.

As we have cautioned on previous occasions, our challenge with hedging is matching the volume of call options to the policy obligations. Historically we have managed that process toward an over hedged outcome.

However, policyholder behavior does not always match our expectations and occasionally we have a quarter where we are under hedged. The 3 basis point variance for fourth quarter translates into 99% hedging effectiveness.

During the fourth quarter, we purchased $1.2 billion of new, fixed-income securities at an average yield of 4.44%, and we funded $131 million of new commercial mortgage loans at an average yield of 4.79%. The majority, $914 million of the security purchases were predominantly investment-grade corporate bonds with an average yield of 4.51%. We also purchased $105 million of commercial mortgage-backed security's with an average yield of 4.34%.

During the fourth quarter we had no calls of government agency securities, and our call exposure is unchanged from what we reported last quarter. At current rate the 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 and $616 million of 15-20 year government agency securities with coupons ranging from--or ranging between 2.96% and 3.2% that are callable at various times in the next two 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.

Annuity product charges for the fourth quarter of $15.2 million include $4.7 million of surrender charges deducted from California policyholders surrendering their policies as a condition of receiving certain benefits in a national class action lawsuit settlement. Excluding this nonrecurring amount, annuity product charges were $600,000 less than third quarter.

The after-tax impact on operating income, including related adjustments to the amortization of deferred sales inducements and deferred policy acquisition costs, was $2 million, or $0.2 per diluted share. The benefit from this item helped offset the negative impact of the hedging outcome on spread results. However, this item contributed to the expense related to class action litigation settlement that I will discuss shortly.

Interest expense for notes payable was $11.9 million compared to $13 million in the third quarter of 2013. The decline is due to the retirement of convertible notes in the fourth quarter. Interest expense will decline further in the first quarter of 2014 as the full effect of the convertible notes retired in the fourth quarter is realized, and additional convertible notes were retired subsequent to year end.

As we reported earlier this week, $22.7 million principal amount of our 5.25 convertible notes due 2029 were retired on February 10, 2014. Other operating costs and expenses were $26.9 million compared to $20.7 million in the third quarter, the fourth quarter amount includes $4.2 million increase in the estimated class action litigation liability based upon developments in the claims process for the settlement of the McCormick litigation and third party costs incurred in fourth quarter associated with the administration of the settlement. Settlement claim forms were due for members of the class by December 6, 2013.

On January 29, 2014 the Court signed a final order approving the settlement and finding the settlement as fair. Consistent with our prior reporting, this item is excluded from our operating earnings.

Excluding this item, operating expenses for the fourth quarter were $2 million higher than the third quarter. This increase was primarily due to certain share -based compensation that is based upon the current fair market value of our common stock.

During the fourth quarter we completed public and private exchange offers with holders of our two outstanding convertible debt instruments, and retired $155 million aggregate principal amount of the convertible notes. The total consideration paid included $191 million of cash and 5.3 million shares of our common stock.

While these convertible debt retirements eliminate the potential dilution from future increases in our common stock price, they negatively impact net income and book value per share. We estimate that these convertible debt retirements and related early termination of a portion of the call spread on our common stock associated with one of the convertible debt issues, reduced book value per share excluding accumulated other comprehensive income by $0.89 per share during the fourth quarter, and by $1.68 per share in 2013.

As I commented in the last two quarterly conference calls, unlined diluted earnings per share there is not an established accounting protocol for determining the 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.

With our stock price trading significantly higher than the conversion price, and the conversion price significantly below reported book value per share, potential further reduction in book value per share from conversions or retirements of our convertible notes could be meaningful. At December 31, 2013 the aggregate principal amount of convertible notes outstanding was $160 million, and we had $206 million of net proceeds remaining from the $400 million July, 2013 Senior Notes offering which we intend to use for retirement of these obligations.

The form and timing of any such activity will be dependent upon market conditions and other factors, and there can be no assurance that any such transactions can be completed prior to the December, 2014 call date for the 5.25% convertible notes, or the September 2015 maturity date for the 3.5% convertible notes. Our RDC at the year end was estimated at 344, up from 333 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. Before I speak to sales and production, I would like to make a few comments about the value proposition of our products.

As you heard briefly in John's remarks, this value proposition was evident again in the fourth quarter. The annual index credit posted in the fourth quarter to policies with anniversaries in the quarter averaged 6.57% with a maximum index credit for any one strategy of 21.72%. So this extends this string of better-than-average annual index credits to seven quarters.

For all of 2013, the average index credit was 5.73% and the maximum credit was up from the fourth quarter of 21.72%. Approximately 43% of the annual index credits posted exceeded 6%, approximately 75% of the annual index credits exceed 4%, and approximately 88% of the annual index credits exceed 3%. So not too shabby for a safe money retirement vehicle.

Fourth quarter sales were $1.093 billion up slightly over the third quarter by 3.8%. The fourth quarter was our third consecutive $1 billion quarter since our record-breaking year of 2011. It was also our second best quarter for the year, in part due to a short commission incentive that we held during the quarter.

Several of our competitors had incentives, so we decided we need to introduce our own to retain some market share for the quarter. The problem with a sales incentive during the fourth quarter combined with the holidays is that January starts with a relatively empty sales pipeline. Our pending count was around 3100 for the fourth quarter and bottomed out in mid-January at 2277, but has since rebounded to 2546 today. The nasty weather in the Southeast and the South has hampered sales a little bit, they have had a rough winter out there and we have heard of counts from producers from several canceled work stops in appointments due to weather conditions.

Sales for 2013 were $4.2 billion, up from the $3.9 billion in 2012. That's a 6.7% increase. This is our third best year in the history of the Company behind 2010 and 2011.

2013 was a busy year as we introduced multiple policyholder benefits, modified and added products and ran two different sales incentive programs. The competition was more aggressive in 2013 that it has been for a long time. Probably since before the financial crisis.

While the competition may be tough, American Equity is doing very well. We enjoy a very good reputation in the marketplace for being consistent, and for having very competitive transparent products, a high-quality asset portfolio and the best service in the industry. Through the first nine months of 2013, the last data available, American Equity was firmly ranked number three in FIA sales. A ranking that we have enjoyed since, 2007.

Our FIA sales were up 16% in the first nine months of 2013, compared to the first nine months of 2012. And our market share was 11%, which is about where it's been for the last couple of years.

Our goal is to maintain and increase our market share and rise with the tide as the FIA market continues to grow. Many of our traditional competitors market shares have been declining over the last couple of years. The Guggenheim owned companies continue to grow their market share.

Switching to progress at Eagle Life, we finished 2013 with over $21 million in sales. For the month of January of this year we're already at $4.8 million.

In the fourth quarter we signed up three new broker-dealers and had two recommit. We also signed up one bank, and so in total we have nine broker-dealers and one bank.

The timeframe for getting [sailing] agreements inked to the first annuity application we're finding takes a little longer in this distribution channel. We have a lot of activity going on however in the Eagle Life distribution. Our story of clean products and great service is resonating at Eagle Life, so we look forward to reporting even better sales results in the future.

We finished the year with 1044 Gold Eagle members, an increase of 10% over 2012. Our Gold Eagle count is an important bell weather for us as sales trends follow the Gold Eagle trends. To refresh your memory, a Gold Eagle agent is an agent who writes at least $1 million in paid annuity premium during the calendar year.

We pay extra close attention to these producers, as it is much easier to market to and build relationships with a known smaller group of producers rather than trying to engage our total agency force of 27,000 agents. These 1044 producers were responsible for 61% of our total production and all-time high.

We were also able to retain 67% of our Gold Eagle producers from 2012. Our average retention rate over the last six years is 61%, so our efforts of focusing on the Gold Eagle members is continuing to pay dividends. One of the interesting statistic from our Gold Eagle program is that we have greater success in retaining our bigger producers.

For example, our retention rate for producers who wrote between $1 million and $2 million the previous year was 54%. While our retention rate for producers who wrote between $2 million and $3 million, that one jumped to 77%. And it jumped again to 88% for those who wrote between $3 million and $4 million.

So our retention continues to go up for the higher volume producers. Our retention for $10 million plus producers, 100%.

In recognition of this fact, we are modifying the Gold Eagle program for 2014 by providing more benefits for our producers who write $2 million plus. One of the benefits will be the award of unvested restricted American Equities stock. This will be in exchange for the stock options that we have been offering to this point.

They can vest the stock over five years by continuing to be a Gold Eagle member. They also received some additional marketing dollars. We really think this modification will encourage producers who write less than $2 million to write more, and we also think it will further improve our retention rate.

Our Gold Eagle program is truly a one of a kind. We know of no other company that offers ownership opportunities to their agency force.

On January 10 of this year AM Best affirmed our A minus excellent rating, financial strength rating, and stable outlook. In their rationale they cited among other things American Equity's formidable market position and long track record in the fixed indexed annuity marketplace, our consistently favorable premiums, earnings results, and adequate risk adjustment capitalization.

We are optimistic about 2014, we feel the FIA market will continue to grow and we plan to grow with it. We introduced a new premium bonus FIA product that we think will be well received and it's available in states that's difficult to get premium bonus products approved. We also introduced two new indexing strategies last week, and will be introducing a new income calculator in March which we are very excited about.

Plus we will have our annual Gold Eagle producer forum in March where we will bring together 500 producers and marketing companies to hear our message and strengthen those relationships. We continue our very unique client appreciation events which we started doing in June, 2010.

This is where our home office team travels to major cities in the US and gathers with our policyholders and Gold Eagle producers for a special lunch. We talk about our history, our rock solid financials and the ABCs of fixed annuities.

But the most important thing we do, is we say thank you. We thank them for entrusting us with their money and we give them that reassurance that we will take good care of their money.

Earlier this week, we held our 74th and 75th events in Southern California where we had 500 policyholders in attendance. Since the beginning we have hosted nearly 15,000 policyholders.

Finally, I came across an interesting article in the February issue of Best Review. It's a publication by AM Best Company. Is says insurers delivering a better customer service experience can outperform the competitors.

The background said that frequently insurers promise one kind of experience but then deliver something different from what the customers expect. They talk about a survey were nearly two-thirds of customers said it was very important for their insurer to provide clear and easy to understand information on their policies, but only 27% of the respondents said that they were very satisfied with their insurer's efforts to do so.

They said what needs to happen, insurers must transition from a product driven to a customer centric operating model. This certainly wasn't news to American Equity, and it is something that we've been doing from the very beginning and we are going to continue to do for the first table future. So with that, that concludes my report and I will turn it back over to John.

Thank you, Ron. Just to wrap up here as Dave Noble said in our earnings release, our fourth quarter financial performance capped off a year in which are net income and operating income, as well as the related diluted per share amounts were record highs. 2013 was a year during which we delivered 14% growth in policyholder funds under management, sustained a double digit operating return and average equity, and increase the cushion of our targeted regulatory capital ratio, or RBC.

We achieve those outcomes while conservatively managing our risks and financial profile. We are well-positioned to continue to capitalize on the growing demand for retirement savings and income products. We expect our invested assets and earnings to continue to grow in periods ahead.

Looking at 2014, our goals are fairly comparable to many of our 2013 achievements. Specifically, we want to grow our invested assets and policyholder funds under management by more than 10%. More specifically, we would like to maintain and build on that $1 billion plus per quarter sales pace that we have achieved in each of the last three quarters and see measurable results through sales from Eagle Life.

We want to continue to generate a double-digit operating return at average equity. More specifically here we will be implementing additional renewal rate adjustments to policies with the objective of bringing our spread back up to the 3% target rate. As we always say, we want to maintain a high-quality investment portfolio with minimal credit loss or risk.

Finally, we want to improve our financial profile by reducing our debt leverage, our SNP adjusted debt-to-capital ratio was just under 26% at year end. We want to see that much nearer or below 20% by the end of the year, 2014, and the additional convertible debt retirements will move us that way.

With that, that concludes our prepared remarks and we will open up the line to questions.

(Operator Instructions)

Our first question comes from Steven Schwartz with Raymond James, please proceed.

Good morning everybody. John I just want to touch on one of the targets from the third quarter, 300 basis point spread, that's still the plan to get there by the fourth quarter of this year?

I would say at this point we are about a quarter behind schedule, Stephen.

Okay. On that topic, can you talk about maybe what you did on renewal crediting rates during the fourth quarter if anything? And kind of the kind of the expectation for first quarter?

At the moment there are a modest group of policies that are getting an adjustment for the first time. These are policies that probably were issued and renewed I think twice at their original crediting rates. The bulk of the policies--big universal policies will start getting adjustments early in the next quarter, that will be where the bulk of the spread restoration comes from that group of policies.

Okay. And then one more if I may and then I will get back in the queue. RBC, did that benefit from the [Meese and the Black Rock] chemical factors?

It did benefit. That was maybe approximately 4 basis points of the increase.

We saw other benefits in RBC from less asset charges this quarter. We saw some of our securities go up in the rating scale. So that benefited us, and then we also had a strong increase in regulatory capital for statutory earnings this quarter.

Okay, thanks Ted. I will get back in the queue.

Our next question comes from Randy, with American Equity, please proceed.

Good morning. I'm happy to be a part of American Equity.

This is Randy Binner with FBR, I just want to follow-up on what Schwartz was asking. John when you said the spread restoration, that's in regard to this hedging issue, is that what you are referring to?

No, I was referring to additional adjustments to crediting rates on policies. A bigger block of policies actually this group has been adjusted once before, and given the declines in yields we've got to make a further adjustment.

Okay. So you have a bigger batch coming through there. In the hedging of 3 basis points there's kind of in the normal range of volatility, is that right?

That's correct. Other than as we've kind of pointed out, we have historically-- I have to look back, we had to go back like eight or nine quarters I think, to find an instance where the last time we had an under hedged position. So we have historically been managing that to where it ends up over hedged.

That isn't necessarily good, that's the outcome. If you are over hedged and the options don't payoff you've owned an option that you didn't really need in that. But with over hedging you don't get the negative surprise, you get the positive surprise in the quarter.

But you know we have to estimate volumes when we buy the options, so we're anticipating how many people are going to exit the Company in between anniversaries, in which case they don't get an index credit. And the exits haven't measured up to the expectations that we used a year ago.

Understood. And then just on sales, Ron I think you said something like 2500 or so pending count at current levels, maybe a little bit lower before that. I missed the exact number.

But that's lower than where you've run in the past. I guess we've always thought of 3000 as pending count is kind of the way to get the $4 billion in sales. Not that a certain level of annual sales is goal, but you been a $4 billion recently.

So I guess the first question is, do you think that the industry is lower because of these weather distortions, or do you this is a function of the PE folks all hitting at once? Should we kind of level to more like a $3 billion or $4 billion range for this year?

Regarding the weather, I think it would be you know, there is a lot of consumers and a lot of agents up in the New Jersey, Washington DC, Pennsylvania areas and now the South is getting hit. So I would assume that the other companies may be feeling it as well.

As far as pending, yes we are down. Let's see what they say we were, we were at 2546. I compare that to a year ago, a year ago we were just over 2600. So we are not too far off from where we were one year ago.

And then I look at you know kind of throw in the fact that we had our sales contest and the holidays, everybody had to get re-engaged in January. So I'm confident that pending will go back up, we're really looking forward to a good year again this year.

Okay. And then one follow-up and I'm sure the other questions. Eagle is that still something that can--I apologize if I missed this in the opening comments.

Is that something that can be a material contributor in 2014? Maybe $300 million in sales or something like that. I think that's what management said in the past.

I think what I said Randy is that we would like to see $200 million I think. If we got $500 million, we'd be pretty thrilled with that outcome but I think $200 million is a doable number.

Okay great, thanks so much.

Our next question comes from Mark Hughes from SunTrust. Please proceed.

Thank you, good morning. The $200 million goal, what's the timing on that?

A full year.

For full-year 2014?

Yes and I would be hesitant to project what kind of pace it might be. You know Ron said just under $5 million in January, I don't know the path, Mark, to how we get to $200 million, but obviously I would figure that the end of the year is stronger than the beginning, so I don't know what to say about what an annualized number might be for say December or fourth quarter production.

Right. Presumably higher.

Yup.

Ron, as you look at this kind of market environment where you've got a big run-up last year and then you've got some volatility here at the start of 2014, interest rates are little choppy. How does that make you feel about underlying demand? Is this the time people are looking for more safe money products, any observations there?

When the stock market is doing as well as it is, people tend to have short memories sometimes on what can happen if there is a big correction. So I think sales would be more robust if the stock market wasn't as high as it is.

On the other hand, as the baby boomers start to retire and they are looking for that safe money alternative, fixed indexed annuities are certainly a good choice. We have been seeing some good articles about FIAs.

President Obama in his State of the Union talked about his My IRA which you know wasn't talking specifically about us, but I think it was a good signal that even Washington DC says, hey you guys need to save some money. And FIAs are a great source where they can do that and avoid the bureaucratic red tape.

Ron, could you give us maybe a little more detail on the competition and what form it's taking, higher commissions, higher you know more attractive product designs. How much more active would you say some of those players are now versus six months ago? Just a little more detail.

This time of the year, competition usually is a little bit more aggressive. There are some companies that I call in and outers.

They get in the market in the first quarter with a high rate, or some kind of commission incentive. They kind of steal some market share, and then the second half of the year we never hear from them again. Or they pull back to where everyone else is.

You know we always expect that, and I think that's the case with a couple of companies. We know one company announced that a commission bonus of 1% here just recently, so that tends to get agents attention.

I think one of the other trends that we see happening that is getting the attention of some agents are indexes that they tout as uncapped strategies. And they are really not uncapped, they are capped. It's just the insurance company manipulating the indexing strategy on the inside, and they are charging a spread for it. But we see some agents kind of migrating that way.

You know we are looking at those kind of strategies also, but we really want to stick to our core principles of offering simple, transparent products, or strategies, and some of the strategies that we see up there with don't think are very transparent. So that is probably between the in and outers getting you know, wanting some market share and some of these non-transparent strategies. Those are probably the two headwinds we have for the start of the year.

Thank you.

Our next question comes from Ed Shields, with Sandler O'Neil, please proceed.

Good morning everyone. Ron I think you mentioned that rolling a couple of new index strategies, could you going to a little bit more detail on that?

I can. There are two new strategies that we just introduced.

One is not new to the industry, it's called the trigger performance method. It's about the simplest indexing strategy that you can possibly have.

Basically what it says is if the S&P 500 is positive, they get a fixed rate of 2.5%. So if the market, if the S& P goes up 0.1 of a percent they get 2.5, if it goes up 2 they get 2.5 but if it goes up 10 they get 2.5. So any positive movement generates a 2.5 rate.

We really think that as interest rates start to go up and we have the ability to increase caps and participation rates, we think that will become more attractive. Because it's so darn easy to understand.

The other one, we think that we're probably one of the first companies to have. I call it an inverse bond strategy. In that it is a strategy that is tied to the 10 year treasury, but in reverse.

You know we have in all of our products we have of course our SNP and our Dow strategies which we're equity linked. We have our 10 year treasury bond strategy which is tied to the 10 year treasury, so when interest rates go down, that performs.

And we have our fixed strategy. This inverse bond yield will perform when interest rates go up.

So we really feel like we have our bases covered, that's one of the roadblocks for a lot of people to get into an FIA is, they say what are you going to do when interest rates go up? Now we have a strategy that will perform when interest rates go up, and it's tied to the 10 year treasury.

Okay, great. All my other questions have broadly been answered already. Thank you.

(Operator Instructions)

Our next question comes from Mark Finkelstein, with Evercore. Please proceed.

Good morning guys. I guess just thinking about the spread restoration going back to that topic. You had set a target to get to 300 basis points by year-end 2014.

You've articulated that it is an area under your control. I guess I'm just curious, what has changed that is requiring that be pushed out a quarter?

We haven't gotten it implemented yet.

Okay. And I guess in thinking about the path act you talk about a chunky set of renewals that you could re price earlier in the year. But how, just on a quarterly basis should we think about that path?

One, the adjustments Mark, will kick in over the course of a full-year period, so the approach would be a big block of policies--why I was hesitating is to figure out if I had anything to say about the distribution of the anniversaries. But we don't know necessarily what that distribution is to know if it is skewed more towards second quarter or third quarter. Although historically, our second quarter has typically been a pretty high production quarter.

Third quarter can be, but not I guess not as regular as the second quarter. First quarter is typically a fairly low--typically the lowest quarter of the year I guess I would have to say. Because of some of the factors Ron described.

Okay, and I guess maybe just going back to my first question, I'm sorry. Was there anything in the market or any other reasons you know causing you to have not started that process a little bit earlier? Is there anything you were saying that you didn't want to do, whether it's competitive landscape, whether to move in rates or anything?

No. Nothing like that.

Okay. My final question is, you talked about changing the comp structure to agents on restricted stock from options, more marketing dollars. How does that affect the all-in economics in terms of the cost of the unit sale, if at all?

The all-in economics stay fairly similar to what they've been in previous years. It's just really a structure change from a stock option to a restricted stock.

Also what we did on that is, previously if they wrote $1 million they did get some stock options and some marketing money. But due to that low retention rate that I spoke to, we raised the bar on that so they now have to do $2 million to get marketing money and the restricted stock. So we basically took the savings from the $1 million to the $2 million level and gave it to our more persistent producers.

Okay. That makes sense.

The bigger picture on that, our product pricing for years has had in addition to the stated commissions for each product a 1% marketing allowance we call it, which is under our control as to how we spend it. A lot of it goes to incentive compensation to the NMO, some of the goes to the Gold Eagle program. So the changes we made are all within the confines of that 1%, and not spending any more than that.

Okay. Thank you.

We now have a follow-up question from Stephen Schwartz, please proceed.

Thanks, just a couple more. Ted you mentioned what your new money investment rate was in the quarter. What's the cost of new money, what was the cost of new money in the quarter?

The new money?

Yes, new sales.

It's got to be down in the 150s range.

Okay.

The fixed rate is at 135 and 150 for our two main product types, or the bulk of our products. The options are a little bit more than that, or the weighted average cost of the index strategies is little bit more than that. So it might be 150 to160, and quite frankly I just haven't looked at the report in a while to see the number, Stephen.

So would that give you the numbers that Ted talked about let's assume that's accurate. At least on new business, you are very close to the 300 basis points, that's what it sounds like?

Yes.

Okay and I don't know if Jeff is there or anybody knows.

He's here.

Hey Jeff. With the declining rates how do January look?

It looks very similar to what we saw on the fourth quarter thus far.

Okay, so no real change there. And then one last one on this topic.

What's the--Ted you usually give this number. I don't think you did. But the space that you have, the average space that you have to lower the cost of money above the MGIR?

Checking here. I believe it's 57 basis points.

That's the fixed.

Fixed at 57.

62.

The other one is 62.

Okay. All right great thanks guys.

We have no further questions. I would now like to turn the call back over to Julie LaFollette, please proceed.

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.

This concludes today's conference, you may now disconnect, have a great day.