American Equity Investment Life Holding Co (AEL) 2014 Q2 法說會逐字稿

Welcome to the American Equity Investment Life Holding Company's second-quarter 2014 conference call. At this time for opening remarks and introductions, I would like to turn the call over to Lisa McQuerrey, Vice President. Please go ahead.

Thank you, Carolyn. Good morning, and welcome to American Equity Investment Life Holding Company's conference call to discuss second-quarter 2014 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.

And it is now my pleasure to introduce John Matovina.

Thank you, Lisa, and thanks to each of you for joining us on the call this morning. We understand there may be a few of you who are suffering from earnings call fatigue already, in that there were several life companies ahead of us today doing calls. So, thank you for joining us.

In the first half of 2014, our performance has plateaued somewhat. However, our foundation for future growth remains quite strong, and prospects for future growth remain excellent. We are selling retirement savings and retirement income products to an ever-growing market, and the aging baby boomers need the security that our principal protected fixed indexed annuity products provide. Similarly, other than defined-benefit pension plans, which are a dying breed, annuities are the only financial product that can provide retirees with a guaranteed paycheck for life.

So looking at a few of the highlights of the second-quarter results. Our attractive product attributes and excellent customer service resulted in more than $1 billion of sales for the quarter. Our operating income of $38.5 million or $0.48 per diluted share enabled us to produce a very acceptable return on average equity of just under 12% on a trailing 12-month basis. And we continue to improve our capital structure and reduce our debt leverage by deploying more of the proceeds from the $400 million senior note offering from last summer to retire our convertible debt. We retired $51 million of principal amount in the second quarter, and have now retired $238 million principal amount of the two convertible debt instruments.

Although our performance has been satisfactory, we are not happy with flattish results, and are determined to increase our sales and improve our financial performance. While $1 billion in sales for the quarter is good, we have been around that level for several quarters now and need to get our quarterly sales levels higher, but not at the expense of acceptable profits. As we've previously stated, the market is quite competitive these days, with a lot of attention directed toward potential product returns rather than guarantees and protection of principal.

Early next month, we will be introducing three initiatives that should enhance our competitiveness in the fixed indexed annuity market. Ron's remarks will include further details on those initiatives, as well as his usual commentary about sales results and the competitive environment.

Our investment spread for the quarter was 2.7%. That was flat with a year ago and slightly less than the first quarter. The decrease was largely due to the foregone investment income on higher levels of cash and short-term investments. We had previously achieved a fully invested position in the third quarter of last year, but did caution that there was still a modest amount of call risk in our investment portfolio. And unfortunately, that call risk did materialize in April of 2014.

And given the lower available investment yields in the quarter, and our longer-term view for rising rates, we did not reinvest the cash from those call bonds promptly. However, the pace of new investment purchases has picked up, and we expect our cash and short-term investments to be at normal operating levels by the end of this quarter.

So let me now turn the call over to Ted for more detailed comments on the second-quarter financial results.

Thank you, John. Our second-quarter operating income of $38.5 million was 8% higher than the adjusted second-quarter 2013 operating income. Second-quarter 2013 operating income included a $5.5 million charge for guaranteed fund assessments related to the insolvency of Executive Life of New York. The diluted share count for the second quarter was 13% higher than the second quarter of 2013, and the increase equates to approximately $0.06 per share. The increase in diluted shares results from shares issued since the second quarter of 2013 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 second quarter of 2014 compared to the second quarter of 2013. Investment spread for the second quarter was 270 basis points, and total invested assets at the end of the first quarter -- or at the end of the quarter were $33.1 billion.

Our spread results of 270 basis points was 7 basis points lower than the previous quarter's spread of 277 basis points. Spread performance was impacted by average yield on investments, which declined 12 basis points to 4.83% from 4.95% in the first quarter of 2014. Much of this decline was due to the higher levels of low-yielding cash and short-term investments during the quarter, which primarily resulted from $500 million in calls of US government agency securities in April of 2014.

The average yield on invested assets also continued to be impacted by the investment of new premiums and portfolio cash flows at rates below the portfolio rate. The average yield on fixed income securities purchased and commercial mortgage loans funded during the second quarter was 4.15% compared to 4.39% in the first quarter of 2014.

The aggregate cost of money for annuity liabilities was 2.13% in the second quarter compared to 2.18% in the first quarter. The Company continued to reduce its cost of money through lower crediting rates, and the 5 basis point reduction in the aggregate cost of money also benefited from improved hedging results. We were 3 basis points overhedged in the second quarter and less than 1 basis point underhedged in the first quarter. The second-quarter hedging outcome is more consistent with our historical experience of managing the hedging process toward an overhedged outcome.

We have been implementing renewal rate adjustments to small groups of policies for some time now, and policies issued in the second quarter of 2011 were adjusted this quarter for the first time since their issue date. In addition, as reported in our first-quarter call, during the second quarter, we initiated additional renewal rate reductions for policies issued prior to July 20th of 2010. These rate reductions will occur on policy anniversary dates over a 15-month period that began on April 14. with the majority of the rate reductions completed by May 15 of 2015.

Our most recent new money rate adjustments were in the third quarter of 2013 when we increased rates in response to rising investment yields at that time. However, investment yields no longer support those rates. While we have been reluctant to reduce new money rate so far this year for competitive reasons, we are aware of our spread and our return on average equity objectives. Reductions in new money rates are likely, should the current interest rate conditions continue.

Interest expense for notes payable was $9.1 million compared to $10.3 million in the first quarter and $6.8 million in the second quarter of 2013. The decline from the first quarter is due to the retirement of convertible notes in the second and first quarters. Interest expense for notes payable will decline further in the third quarter of 2014, as the full effect of the convertible notes retired in the second quarter is realized, and if additional convertible notes are retired in the third quarter. The increase in interest expense compared to the second quarter of 2013 is due to the issuance of $400 million of senior notes in July 2013, offset in part by the reduction in interest expense for the retirement of our convertible notes.

Interest expense on our subordinated debentures of $3 million in the second quarter is not materially different from earlier periods. We have $169.6 million of floating-rate subordinated debentures, which support $164.5 million of floating-rate trust preferred securities held by third parties. We have swapped $85.5 million of floating-rate trust preferred securities to fixed rates, and have capped the floating-rate on the other $79 million for a term of seven years beginning March 2014 for the swap, and July 2014 for the caps. These derivatives are effectively raising the interest cost on the underlying trust preferred securities.

Pretax operating income in the second quarter was reduced by $600,000 for the interest rate swap. The caps are expected to reduce pretax operating income by $142,000 each quarter, unless the three-month LIBOR exceeds the [250] cap, in which case we would benefit from the caps, and our effective interest cost for the underlying trust preferred securities would be capped at 6.22%. The amounts for each of these derivatives are reported in change in fair value of derivatives.

Excluding amounts related to class action litigation settlements, other operating costs and expenses were $20.9 million in the second quarter compared to $21.3 million in the first quarter of 2014 and $28.1 million in the second quarter of 2013. The second-quarter 2013 amount includes $8.5 million for guaranteed fund assessments related to the insolvency of Executive Life of New York. Adjusting for this item, operating expenses for the second quarter of 2014 were $1.3 million higher than the second quarter of 2013. This increase is related to increases in compensation expense and risk charges on a reinsurance agreement.

As John commented earlier, we further reduced our debt leverage and potential additional dilution from further increases in our stock price this quarter through the retirement of $51 million principal amount of the two issues of our convertible notes. The total consideration paid included $65.1 million of cash and 1.5 million shares of our common stock. We estimate that these convertible debt retirements reduced book value per share by $0.49 per share and net income by $0.07 per share during the second quarter.

Our S&P adjusted debt to capital ratio declined from 25.8% at year-end 2013 to 22.8% at the end of this quarter. We want to see that much nearer or below 20% by the end of this year.

As I commented in the last several quarterly conference calls, 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. 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 June 30, the aggregate principal amount of convertible notes outstanding was $78 million, and we had $96.5 million of net proceeds remaining from the $400 million senior notes offering, which we intend to use for the retirement of these obligations. The form and timing of any such activity will be dependent upon market conditions and other factors, and there could 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 RBC at the end of the second quarter was estimated at 356%, up from 344% at the end of 2013. We remain comfortably above the 300% rating threshold from AM Best, and we have adequate regulatory capital to support much larger sales volumes than we are currently experiencing.

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 about sales and marketing, I would like to make a few comments about the value proposition of our products. Once again, policyholders with an anniversary in the second quarter had some really nice index credits with the rising stock market, but had no risk to their principal or previously credited interest. The average index credit in the second quarter was 5.63%, and the largest was nearly 17%.

For the first half of this year, 44% of the annual index credits were 6% or more, and 89% of the index credits were at least 3%. One of Dave Noble's principles of excellence when he formed the Company was to provide above-average value to our policyholders. And keeping this as a core principle has certainly helped American Equity enjoy the great success we have had over the years.

We are now onto sales and marketing. Sales for the second quarter were $1,042,000,000, up from $921 million in the first quarter. We are down, however, from $1.1 billion in the second quarter of 2013, and we are down 5% for the first half of this year compared to the first half of last year. As John mentioned, while we got back to the $1 billion mark in the second quarter, we are not completely satisfied with our progress. With that said, we are not going to chase sales at the expense of acceptable profits, nor are we willing to introduce products or initiatives that cannot withstand the test of time.

So it's okay to be contrarian if we are doing what's best for the Company and our policyholders. We are in a highly competitive industry that is prone to marketing gimmicks that attempt to embellish the benefits of fixed indexed annuities, and our products don't need embellishing. And the index credits that I spoke of earlier are a testament to that. We credited an average of 5.63% in the second quarter, in case you missed it.

Our policyholders are depending on us, first and foremost, to guarantee principal, guarantee interest and guarantee income. We have lost some market share to companies who offer volatility control index strategies that are being marketed as uncapped. We don't think the strategy is a bad strategy; it certainly has its place in our industry. We just think the marketing as uncapped is setting up unrealistic consumer expectations in the future. Furthermore, they are being marketed with illustrations and back-testing, which only exacerbates the problem, and puts a ton of emphasis on upside potential rather than the guarantees of our products.

We have been exploring this strategy, however, for several months, but we did not want to introduce one unless it met certain criteria. And the most important criteria being that it was not a proprietary index, it was trackable, and it was transparent. We also want to separate ourselves from the crowd, and we want an innovative index and how that strategy is marketed. By now, you probably know one of our August initiatives that was in our press release is the introduction of a volatility controlled index.

It's called The S&P 500 Dividend Aristocrats Daily Risk Control 5% Index. That's a mouthful. We are actually going to call it The Volatility Controlled Index. It is an annual point-to-point, annual reset strategy, with a 100% participation rate minus a fee. The fee is [2.25] or [2.50], depending on the product to which it's attached. A unique feature of this strategy is that the index does include dividends. And there are a minimum of 40 S&P 500 companies that make up the index, and they all have at least 25 years of track record of paying increasing dividends.

As far as the marketing goes, we will not market this as an uncapped strategy, nor will we use back-tested hypothetical illustrations. What we will say is it's a good strategy for today's low rate environment, and it should provide more predictable interest credits. But the highs won't be as high and the low's won't be as low. We still believe that monthly point-to-point strategy has the most index credit potential in a climbing stock market. And, of course, the good old S&P 500 annual point-to-point strategy is certainly the most popular and the easiest to understand.

Our second August initiative is a new lifetime income benefit rider. We have already a very competitive rider benefit; but again, we want to differentiate ourselves from the crowd and solidify our status as the go-to company for income. This new lifetime income benefit rider will have gender-based payouts versus unisex payout rates. This isn't new in the mortality business. Annuities and payout phase use gender-based payouts and life insurance premiums are gender-based too.

We are simply taking a special and very popular benefit and making it better. In the end, our male payout rates will be higher for all ages, and our female payout rates will be slightly higher for four out of 10 ages, and slightly lower for six out of 10. We are the first company in the fixed indexed annuity market space to introduce gender-based lifetime income benefit rates.

Finally, our third August initiative is a new commission schedule. Currently, our producers receive 75% of their total commissions at policy issue. They receive another 12.5% in the 13th month and the final 12.5% in the 25th month. We introduced this commission structure back in 2009, when our competitors were reducing commissions across the board. We did not reduce commissions; we simply stretched the total payments over 24 months.

While it wasn't popular when it was introduced, it has become hugely popular today. Our producers are comforted to know that they will be receiving benefits two years down the road for work they are doing today. Our total commissions are greater than most of our competitors over a two-year period, but commissions paid in the first year are approximately 100 basis points less than our competitors.

We believe this is a hindrance to recruiting new agents to American Equity. So, the new schedule reduces total commissions by 100 basis points, but pays all the commissions at policy issue versus spreading it over 24 months. This will put our commissions paid at issue at par with the bulk of our competitors.

We don't think many of our current producers will switch to this option, but we do believe it will help us recruit new agents to American Equity. We recently had a group of 40 Gold Eagle producers in our office, and we polled them on this very question. No what would you prefer -- getting more total commissions over 24 months, or getting less total commissions but more in the first year? And 100% of the participants selected our current schedule of paying more over 24 months.

Our marketing team has been out visiting producers and marketing companies the last two weeks about these three upcoming initiatives. And so far, we've had a very positive response. And we are excited for a more robust second half of the year.

Our pending count peaked at 3400 in April and has not been above 3000 since late June. The average daily pending count for July has been just under 2800, and we hope these three initiatives will help us report better third-quarter numbers.

Turning to Eagle Life, we continue to be very busy with our marketing strategy. The second-quarter production was flat, however, at $17.4 million compared to the first quarter of this year. However, we are up the first half of this year from $10.7 million in the first half of last year. That's a 225% increase.

We've had some really good momentum this year. We have had some competitors introduce some super-competitive multi-year guaranteed rate annuities, which has kind of watered that down a bit. They are coming out with some rates that are 75 basis points more in a rate on a five-year rate guarantee. And that five-year rate guarantee product is, of course, really interest rate-sensitive, and it serves as the primary entry point into many of the banks and broker-dealers, primarily the bank channel.

Once a working relationship is established, that's when we start to get the FIA products introduced in both of these channels. We would've liked to have been further along with Eagle Life, but we have learned the approval process takes a lot longer in the bank and BB channels, and it is more rate-sensitive than in the independent channel.

To date, we have three banks and 20 broker-dealers that have signed selling agreements; 14 of those 23 were signed up in 2014. We remain encouraged, and continue to feel that Eagle life is an opportunity for growth within the American Equity family companies.

Finally, I'm just very proud of our home office team. They continue to provide the best customer service in the business -- another principle of Dave Noble's when he formed the Company. And I really believe that the excellent customer service is what's helping our sales today and separating us from the pack on a service level. And that will be the case going into the future.

And that concludes my report. And I'm going to return the call back to John.

Thank you, Ron and Ted. So, to kind of wrap up, while our second-quarter results were not exceptional, they do keep us on track to achieve our goals. And we are well-positioned to continue to capitalize on the growing demand for retirement savings and retirement income products.

As always, we remain dedicated to growing our assets under management. And specifically there, we want to maintain that $1 billion-plus sales level each quarter and grow it. And we want to see some measurable sales progress out of Eagle Life. While the sales environment for our products remains competitive, we are optimistic that the initiatives we will introduce early next month will translate into stronger sales in the second half of the year. And of course, we want to continue to generate double-digit operating returns on equity, and we'll -- as we've talked about for many quarters, be very mindful of where spread results are at, and continue to manage crediting rates, both renewal and new, to get our spreads back up to that 3% target that we've achieved in the past.

So with that, I'll turn the call back to the operator or open up the call for questions.

(Operator Instructions). Randy Binner, FBR Capital Markets.

I have a few. I guess for Ron, I caught the July pending at 2800, but what were the other pending counts you rattled off, I think, for the past couple months?

The -- for the last -- we peaked in April around 30 -- let's see, what was it -- it has been around the 2800, we peaked in April at 3400, and it's kind of been hovering around 3000, and then it's not uncommon for pending to kind of slide during vacation time as well. But it's been around 2800.

And then is it -- so it's low in July and August, and then it kind of ramps back up into the back part of the year usually, is that right?

When kids start getting back to school and everybody kind of returns to a normal schedule, things start to ramp up again. But -- so it's not completely unusual to have lower pending. It is lower than it was last July. Last July was over 3000.

Yes. So -- okay. So -- yes. So this is -- you're going to be kind of flat at that this year, so that reads to the new initiatives. And I guess on the commission structure, just a couple of clarifications or question. One is that the individual has the option to use the newer old structure for the commissions, correct?

Correct. They actually have three different choices. They can get what we call the [611] or now they can get the [700], or they can get [4.5] with a 75 basis points trail.

Okay, got you. And I think that -- I'm trying to dust off my RBC model here which hasn't been getting as much work. But back when you extended out the commission structure I believe there was an RBC benefit that came from that. So is there -- do you have any way of estimating what the RBC impact would be if, hypothetically, everyone switched to the new upfront commission structure? Is that the right way to think of it?

(multiple speakers) That's exactly the right way to think of it, Randy. And the impact on RBC is estimated at about 5 basis points. And the reason is not bigger is because while we are paying more in the first year -- and that 5 basis points was assuming 100% opted for [700], but the reason there's not a bigger impact is because even though we are paying more in the first year, we are paying less overall.

Got you. And you landed at what, [356], is that right, on the RBC this quarter?

Right.

Okay. There's been a lot of RBC ratios this morning. And then just a modeling question. On other expense and operating costs on the income statement, that item -- so this is the item that all-in was in the quarter, it's about $15 million, and it's about $19 million in the first quarter of 2014. Usually we would run kind of pretty comfortably north of $20 million a quarter for all those items together. So just wondering -- I mean, these are unusually helpful numbers in that regard. Is there IT initiatives, or executive compensation, any items that would kind of catch up in the back half in that category and put us back in kind of the north of $20 million range?

Randy, where are you getting the first quarter operating expense, what number are you looking at?

Well, it's about $19 million all-in. (multiple speakers) I might be calculating it a little different then you reported, so I guess I'll ask it more broadly. Other operating costs and expenses. Those have been lower the front half. Would those kind of peak back up to more normal levels in the back half? And litigation is a big item in there too.

Well, I think the run rate you see right now is probably pretty normalized here for this quarter. Because there's really nothing unusual in there. And obviously, in prior quarters, back when we had litigation expense that was obviously affecting it on the litigation front. That's all quiet now, and so we are not really incurring very much litigation costs any more. So, I mean operating expenses now are $20.9 million. (multiple speakers) That's a pretty normalized amount now.

Okay, and there's nothing timing-wise in the back half, like I said with IT initiatives or any other initiatives where that might pop back up that you are aware of?

No.

Great. That's all I have. Thank you very much.

(Operator Instructions). Mark Hughes, SunTrust.

The new product rollout, the new initiatives, is it your experience, Ron, that those will have a pretty immediate impact, or do they build slowly?

I think we will see an immediate impact, at least in activity. I anticipate our pending count and our inflow of applications should increase during the month of August. A lot of times when you've got transfers and [1035] exchanges involved, actually the numbers hitting the production report tend to lag a bit. But my hope is that we will see an immediate impact once we get this introduced and get the word out.

And then any particular updates on security benefit or Allianz, kind of what they are up to in the market?

Well, the last we have heard, both of those companies have made some adjustments. Allianz has increased the fee on their Barclays dynamics bond index. And although they have -- and they have reduced the bonus that they pay on their income account value for income purposes. Security benefit has done some of the same. They've reduced some of the bonuses on their income account values. And so they've made some adjustments. But they're -- and those are -- I guess other companies, we noticed FMG has reduced rates a little bit, but that's the primary ones.

Right. Do you think that's material? From a competitive standpoint?

You know, anytime they do something we don't help. (laughter) But I don't know that I would consider them material. They are not huge changes but they are changes.

Right. Okay. And then Ted, what should we think about in terms of spread for the third quarter? Anything that hasn't come up that may impact the spread? I mean are we looking flat, up, down? Based on what you know now, how should we think about 3Q?

Well, 3Q, we will see -- we should see -- continue to see some benefit from the rate reductions that we have done. The rate reductions on the larger block of policies, which we reported last quarter, we are adjusting on $15 billion of liability, we are adjusting those down by 20 basis points. Those started in April. We should start to see the effect of those rate adjustments. And then prior rate adjustments that we have done should continue to flow through. So we expect to see a continued reduction in the cost of money.

On the top line on the yield, obviously, what will help in the next quarter is putting the excess cash and liquidity that we have to work, which is our goal to have that all put to work before the end of next quarter.

And the impact of that, if you do get it put to work, how many basis points would that be?

That is going to be somewhat dependent on the yields that are going to be available for us to purchase, so that's a little hard to estimate upon what that impact would be. The weighted average -- I would say the weighted average amount of excess liquidity that we held in the quarter was a little over $600 million, was the weighted average.

Right. Do you think those things will offset, the spread will be relatively flat?

I don't know that I know that it will be relatively flat.

Do you think it will be up?

Mark, I don't think we want to make a prediction there. I mean, I think getting the cash put back to work is positive, and that -- and certainly rate reductions are positive. So -- but the timing of the purchases is kind of a wild card, and that's -- while we talk about things that influence it, we just don't make those types of projections or predictions.

Understood. Thank you.

Steven Schwartz, Raymond James.

That made me laugh. That was classic. Way to go, Mark. (laughter) A couple of things. To ask one of Mark's questions different way, the excess liquidity or at least the [500] from the agency that was called in April, Ted, what was the effect on yield from that going from wherever it was to basically investing in cash? Do you know that?

I don't know that. But I mean, I will say that if you were going to look at the amount of cash that we held during the quarter, the weighted average, and if you assumed that we invested it at the rate -- the average rate which was [4.15] for the quarter, that would calculate out to approximately 7 basis points.

Okay. All right. That will work. (multiple speakers)

I mean, that's typically the calculation, but that's assuming that we would be able to invest that at the [4.15] that was available to us in the quarter.

Sure. Okay. That's good. And then one more follow-up and then some other things. So you had the $15 billion was 20 EPS, could you remind us what the other block was?

The 2011, do you remember, John?

That's -- I don't know that we've ever given a quantification on that. I mean, it would only be a few basis points on the whole portfolio because it's a single year of business.

I think what was commented on is that we expected -- I think last quarter, we commented like 2 to 3 basis points in reduction of cost of money from that rate adjustment that we expected to see this quarter and into next quarter.

Just from the smaller one?

From the smaller one.

All right. And then some of my own here. Ron, I'm not going to ask you to say what the name of that index was again, but do you know the symbol?

Yes, I do. It is SPXD5UN.

So that's SPX, David, five, U, Nancy?

Correct.

Okay. And -- so that sounded to me like that was some type of S&P 500 index -- subset of the S&P 500 that paid dividends of some amount? Would that be accurate?

Correct. It's 40 companies that have a 25-year track record of paying dividends. (multiple speakers) And increasing dividends.

Okay. All right. And then -- you say it's volatility control. Is there some type of overlay, you're moving into fixed income if something happens? Or it's just that this is going to be pretty stable because of the nature of these stocks? What's the volatility?

Well, the volatility trigger is 5%. We want to keep it within the 5% range. And the two mechanisms are, of course, the Aristocrat Index itself, and then the other part is basically cash. I think we stay at a three-month LIBOR.

So it's this index or the -- or cash. And if one -- so if the index moves down 5%, you move to cash? I guess I'm not quite getting it.

Well, the index, it's not -- the index as it's reported already has calculated what the cash versus the Aristocrat component is.

So, what (multiple speakers) --

(multiple speakers) You move in and out of cash based upon the volatility of the index. And I don't know whether it's three-month back volatility; I'm not sure of that technical aspect of it. But obviously, all the S&P 500 has a volatility associated with it. I think VIX is the 30-day volatility measure. And then you've got one-year volatility in all that. So it's -- if the volatility gets outside of a parameter, then they shift you to cash.

(multiple speakers) It's rebalanced on a daily basis.

Okay. I got you. (multiple speakers)

The concept would be that during periods of high volatility, which typically equate to declines in the performance of the index, you're in cash; and then in lower volatility, which tends to equate with positive performance, you're in the equity side.

Okay. All right. All right. And then one more, if I may. On the new -- I was thinking about this -- on the new commission, does that change -- I'm thinking now from accounting and modeling. Is that -- obviously, it will be small to start with if the major producers don't switch. But does that, over time, change things like DAC amortization or what's capitalized and things like that?

Absolutely. We only capitalize what we pay. So, absent any other changes, if spreads didn't change or anything like that, the people taking the 7% upfront commission would be more profitable to us than the people taking the spread commissions. And the way that profitability would emerge would be through lower DAC amortization because we capitalize less.

Okay. Is the new commission -- on a present value basis, is the new commission schedule more expensive? I mean, you lower the total rate but you're not paying over three years.

I don't think present value-wise it's more expensive, no. It's got to be less expensive. I mean, because the stretch is only two years, so I don't think -- 7% [of] times zero versus [6.11] with the [one] and the 12 months later, and the second one 13 -- or 24 months later, that's got to be a higher present value than 7%.

Okay. So -- all right. Okay. I got it. All right. Thanks, guys.

Thank you for the question. We have no further questions, ladies and gentlemen, so I'd like to now turn the call back over to Lisa for final remarks.

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

Thank you for your participation in today's conference. That concludes the presentation. You may now disconnect. Good day.