American Equity Investment Life Holding Co (AEL) 2015 Q4 法說會逐字稿

Welcome to the American Equity Investment Life Holding Company's fourth-quarter 2015 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.

Good morning and welcome to American Equity Investment Life Holding Company's conference call to discuss fourth-quarter 2015 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; Ron Grensteiner, President of the Life Company; and Jeff Lorenzen, Chief Investment Officer. Some of the comments made during this call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act. There are a number of risks and uncertainties that could cause actual results to differ materially from those expressed or implied.

Factors that could cause the actual results to differ materially are discussed in detail in our most recent filings with the SEC. An audio replay will be available on our website shortly after today's call.

It is now my pleasure to introduce John Matovina.

Thank you, Julie, and good morning, everyone. Welcome to our call.

As we indicated in our press release, fourth quarter financial results capped another record year for our operating income and the related per-share model. Consistent with our results over the past several quarters and years, we're performing well in the three key areas that drive our earnings and financial performance.

And those areas are: growing our investment assets or policyholder funds under management; generating a high level of operating earnings on the growing earnings base; and then minimizing impairment losses in our investment portfolio. For full-year 2015 we delivered 16.6% growth in policyholder funds under management. We generated a 12.5% operating return on average equity and our investment impairment losses after DAC and related tax effects were only 0.5% of average equity.

During the year we also strengthened our capital position. In August we issued common equity to support the substantial growth we were experiencing during last year, and that August 2015 equity offering also provides us with the right under two forward sales agreements to issue additional equity this year at a price of roughly $24.00 per share.

Also during last year Standard and Poor's recognized our greater strength and upgraded our holding company rating from below investment-grade to investment grade. Now in speaking with our distribution partners we regularly highlight our consistent presence in the fixed index annuity marketplace. American Equity has now been a top three writer in the fixed index annuity market based upon sales for 15 out of the last 16 years.

And that market consistency shows up year after year in our financial performance. Over the past 10 years our operating income is compounded at a 13% annual rate, while policyholder funds under management have grown 15% annually. We believe that track record classifies American Equity as one of the best growth companies of the past decade in the life insurance industry.

But looking at some specifics for fourth quarter results, our operating earnings were $50.1 million which equates to $0.60 per diluted share. And the investment spread was 2.67%. Low interest rates do remain a headwind to our operating earnings and investment spread. And lower rates on new investment assets continue to offset the benefits we are receiving from reducing our liability rates and policies.

Fourth quarter sales, as we announced were $2.1 billion. That's a record for any single quarter, and we were up 86% from the prior year and 17% sequentially. Our outstanding sales for the fourth quarter and full-year benefited from meaningful success we had with Eagle Life selling fixed-index and fixed-rate annuities in the broker, dealer and bank distribution channels. And as usual Ron's remarks will have comments on production, the competitive environment and our sales outlook.

A key concern for life insurance industry these days is the exposure companies have to energy and metals and mining sectors in their investor portfolios. Many recent research analyst reports have cited American Equity for our high investment leverage relative to other life insurers in the research coverage universe.

And course by extension that higher investment leverage also means more exposure to the energy and metals and mining sectors relative to our stockholders' equity. This isn't surprising to us, given the nature of our business and the nature of the business of the other life insurance companies in that comparative analysis.

As a fixed annuity company, our earnings are largely derived from our investment spread, which is earned within the bounds of prudent risk-based capital metrics. However, these metrics do result in that higher investment leverage cited in the analyst reports. We have always been mindful of this risk and believe we have successfully minimized the credit risk exposure in our investment portfolio.

We have largely avoided purchases below investment-grade securities and our investment team has an excellent track record of avoiding securities that were subsequently downgraded to below investment-grade or incurred impairment losses. Over our 20-year history during periods where life insurance experienced above normal losses from fixed maturity investments, our loss experience was better than the industry norm, and I'm optimistic that when the current situation normalizes, whenever that may be, that American Equity will again be among the life insurers with the best outcomes.

Jeff Lorenzen, our Chief Investment Officer, is with us on the call today and will provide some additional commentary on our investment portfolio and our exposure to those troubled sectors. We've also added some additional tables on the sectors in our financial supplement for your review.

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

Thank you, John.

Our operating income of $50.1 million for the fourth quarter was 1% lower than fourth quarter 2014 operating income of $50.7 million. We had a modest 1% increase in pretax operating income. However, the effect of income tax rate for the fourth quarter was higher than fourth-quarter 2014 and flung the after-tax outcome to a small decrease.

The related diluted per-share amount at $0.60 for the fourth quarter was 5% lower than fourth-quarter 2014 diluted per-share amount of $0.63. The diluted share count for the quarter was 5% higher than fourth-quarter 2014 diluted shares. Investment spread for the quarter was 2.67% compared to 2.83% last quarter as a result of a 17- basis point decrease in average yield on invested assets and a one basis point decrease in the cost of money.

Average yield on invested assets continued to be favorably impacted by non-trendable items and unfavorably impacted by the investment of new premiums and portfolio cash flows at rates below the portfolio rate. Make-whole consent fees from several bond calls, which together with certain prepayment income added 7 basis points to average yield on invested assets for the quarter, compared to 14 basis points for such items in the third quarter.

Adjusting for the effect of non-trendable items, which also included holding more cash and short-term investments this quarter than the first two quarters of 2015, the average yield on invested assets fell by 10 basis points from the prior quarter. The average yield on fixed income securities purchased and commercial mortgage loans funded during the fourth quarter was 4.03%, compared to average yields ranging from 3.73% to 3.89% in the first three quarters of 2015.

The aggregate cost of money for annuity liabilities was 1.95% in the fourth quarter, compared to 1.96% in the third quarter. This decrease reflected continuing reductions in crediting rates, but the effects from rate reductions were partially offset by a one basis point decrease in the benefits from over-hedging the obligations for index-linked interest from two basis points in the third-quarter to one basis point in the fourth quarter.

We have been counteracting the impact of lower investment yields by reducing the rates on our policy liabilities. But the impact on the cost of money from these reductions is less than the impact on average yield on invested assets from investment purchases by a few basis points.

We continue to have flexibility to reduce our crediting rates, if necessary, and could decrease our cost of money by approximately 48 basis points through further reductions in renewal rates to guaranteed minimums, should the investment yields currently available to us persist.

Other operating costs and expenses were $25.7 million this quarter, compared to $24.5 million in the third quarter and $21 million in the fourth quarter of 2014. The increase in operating expenses compared to the prior-year fourth quarter was primarily due to more reinsurance risk charge expense due to growth in our policyholder liabilities subject to our reinsurance agreement, pursuant to which we cede off excess regulatory reserves to an unaffiliated reinsurer, and an increase in salary and benefit expense related to an increased number of employees and cost of overtime.

In addition fourth-quarter 2014 operating expenses benefited from a reduction in the accrued liability for guaranteed fund assessments for Executive Life of New York. The majority of the increase in operating expenses this quarter compared to third-quarter was attributable to risk charges on financial reinsurance and salaries and benefits.

Our risk-based capital ratio is at 336, down from 354 at the end of the third-quarter and 372 at the end of 2014. We remain comfortably above the capital thresholds for our ratings from AM Best and Standard & Poor's.

If internally generated capital in 2016 is not enough to maintain regulatory capital at sufficient levels to support our current rating, we could exercise our rights under two forward sales agreements from our August 2015 equity offering and receive $135 million in net proceeds from the issuance of an additional 5.6 million shares of our common stock.

These forward sales agreements, which expire in August 2016, enable us to better manager our capital by matching the issuance of additional equity with any need for such capital that might arise from continued growth. If we do not need all or a portion of the net proceeds available to us from physical settlement of the forward sales agreement, we can cash or net share settle the amount not needed and reduce or eliminate any additional issuance of shares of our common stock.

Prior to expiration or settlement of the forward sales agreements the shares underlying the forward sales agreements will be reflected in our diluted earnings-per-share computation using the treasury stock method. As such there will be no dilutive effect on earnings-per-share except during periods when the average market price of our stock is greater than the applicable adjusted forward sales price, which was $24.73 per share at December 31, 2015.

The share count for fourth-quarter diluted earnings-per-share included 270,000 shares for the dilutive effect of the forward sales agreements. Before I turn the call over to Jeff Lorenzen for comments on our investment portfolio, a few comments on other-than-temporary impairments.

For the quarter we recognized $13.3 million of OTTI with $12.4 million attributable to the securities of one issuer in the metals and mining sector and $900,000 attributable to four residential mortgage-backed securities. Although the securities from the metals and mining issuer remain on our watchlist, we do not anticipate the recognition of any further OTTI for this issuer. The securities had a $3 million unrealized loss at December 31 as the impairment recognized was based upon the expected credit loss and not the fair value of the securities at December 31.

Now I'll turn the call over to Jeff Lorenzen.

Good morning.

Throughout the year we maintained a very high-quality low-risk portfolio. Being prudent stewards of capital is critical both to our marketing success with policyholders and with our financial success with shareholders. At December 31, 2015, 96.5% of our fixed maturity securities were rated investment-grade by nationally recognized statistical rating organizations.

This represents a modest increase from 95.9% investment-grade securities at December 31, 2014. This year our portfolio has increased in average credit quality from A- to A in anticipation of building credit concerns in the overall market. We believe and history shows our high-quality bias will continue to protect us from negative shifts in the credit markets.

We invested $6.8 billion in fixed income securities this year with an average credit quality of A. Based on any IC designations, we had 98.1% investment grade at year-end 2015, compared to 98.2% at year-end 2014. As has been the case for several years, the difference in the investment-grade percentages for NRSROs and the NAIC relates to RMBS.

Our below investment-grade portfolio as represented by the NAIC designations is 1.9%, or a carrying amount of $701 million. The below investment-grade securities include $234 million of double-B mandated, senior secured voting rate bank loans managed by GSO Blackstone, which trades near par. Of the remaining $467 million, $132 million are energy-related, and $109 million are metals and mining related.

We believe our exposure to the troubled energy and metals and mining sector is limited and manageable. As of year-end our total energy holdings represent approximately 7.5% of our fixed maturity securities, or approximately $2.7 billion in amortized cost. It is a diversified high-quality portfolio that is limited in the amount of capital at risk for any one issuer.

Approximately 95% of the energy-related securities our investment grade based upon the NRSRO rating, our lowest rated energy three holding is rated double-B. In addition metals and mining represents 1.7% of our fixed maturity securities, or approximately $594 million of amortized cost at year-end. It is diversified across 26 issuers, and 82% of the portfolio are currently rated investment-grade upon their NRSRO rating.

Since year-end we had four issues with an amortized cost of $80 million in the energy and metals and mining sector downgraded by S&P or Moody's. Based our stress test analysis we estimate that an additional $350 million of our energy in metals and mining exposure has the potential to migrate to noninvestment-grade to the credit cycle.

We estimate that if all of the securities were downgraded to below investment-grade, our risk-based capital ratio would decline by six basis points. Our watch list includes securities deemed at risk for future other than temporary impairment assessment. The list at year-end 2015 included securities from 10 issuers with an amortized cost of $126.5 million, a fair value of $73 million, and an unrealized loss of $53.5 million.

Energy and mining securities represent approximately 67% of the total amortized cost. We added three issuers to our watchlist in the fourth quarter. Two in the metals and mining sector and one industrial. We continue to maintain a highly disciplined and rigorous approach to evaluating and managing credit risk in our portfolio. We monitor capital risk for each holding and the credit portfolio as a whole.

In addition we diligently monitor individual issuers' exposure as a percent of capital assigned based on each security's credit quality in terms of maturity. This process has and will continue to guide our risk management discipline to protect the Company from adverse downside capital strain.

At this time I would like to turn it over to Ron Grensteiner, the President of the Life Company.

Thank you, Jeff. Good morning, everyone.

While it was indeed an incredible year, a record-shattering year, I'm very proud of our American Equity team. Many companies have a collapse in service when they experience a significant increase in sales volume, but not our team. They held it together and maintained our excellent customer service reputation.

And they did it because they care about our special culture, and yes we did have a few aches and pains, but overall they passed with flying colors. So as reported looking at sales on a consolidated basis for 2015, those sales were $7.1 billion, a 69% increase over 2014. And we shattered our previous sales record of $5.1 billion set in 2011. This includes over $500 million from Eagle Life, which I will speak to in a few minutes.

Sales in the fourth quarter were a record $2.1 billion, an 86% increase over the fourth quarter of 2014. December was a record month with $818 million, and we had a record day on December 28, with over $90 million. A number of factors led to our success. And most important, I believe we were rewarded for our consistent presence in the FIA market.

We have been in the top three for market share 15 of the last 16 years. We were the benefactor of competitors pulling out of the market or reducing their sales targets. We had a Lifetime Income Benefit rider, which had among the highest benefits in the FIA market for most of 2015. And finally, the FIA market expanded and we expanded our market share with it.

We've not seen official numbers yet, but LIMRA is projecting that December FIA sales were an all-time high, with approximately $6.1 billion. Which means the fourth quarter was probably an all-time high quarter, and 2015 an all-time high year.

While we will certainly celebrate 2015 sales and always strive to grow, it may be difficult to top 2015's results in 2016. Several competitors have emerged with very robust lifetime income benefit riders, and we no longer have the highest benefit on a consistent basis, but we are still very strong.

There is a current faction of producers who look exclusively at income and no other variables. They tend to dismiss the importance of a company's investment portfolio, renewal rate history, reputation and levels of customer service. So I ask producers, what good is higher income if the company financials cannot support it? Or if policyholders receive an inferior renewal rate? Or if they can never talk to a live person at the company for service requests?

In addition to the lifetime income benefit rider challenge, there are a few companies who are currently running commission incentives and income benefit specials. This is not unusual, as many companies try to grab some market share early in the year.

So in 2016, maintaining the basic principals that our founder Dave Noble laid out for us 20 years ago will be very important. We do not need the highest benefits, interest rates or compensation. We need only to become competitive. But we do need the best customer service as the true difference maker.

With that said we are excited about a new indexing lifetime income benefit rider that we plan to introduce towards the end of the first quarter. Instead of a guaranteed roll up interest rate on the income account value or benefit base. The interest rate credited is the same as the interest credit to the contract value times a multiple. This is particularly appealing for those seeking higher income potential in today's low interest rate environment.

We have enjoyed our dominance in the guaranteed lifetime income market and view an indexing income option as great thing addition to our FIA portfolio. We're also introducing an illustration system in conjunction with the indexing income benefit, which we expect will be well received by the producers. Illustrations do aid in the explanation of index and income.

Turning to Eagle Life we are optimistic about our growth potential in 2016. As I mentioned in my earlier comments Eagle Life sales were $505 million in 2015, a 400% increase over 2014. The bulk of the production came from two sources, which demonstrates the potential once we solidify a relationship.

We have added some very promising bank and broker-dealer relationships to the Eagle Life roster. As of today we have 45 selling agreements, of which 18 were added in 2015, and two in 2016. Having a competitive lifetime income benefit is very important in the independent agent channel, but to a lesser degree in the bank and broker-dealer channels. Only 10% of Eagle Life's policyholders choose to add the optional lifetime income benefit rider, whereas at American Equity roughly 50% of the policyholders choose a four-fee rider.

Indexing strategies with competitively priced caps and participation rates are more important in the bank and broker-dealer channels, especially in volatile markets like today. Principle protection and opportunity the for upside potential are driving interest in our products in these channels.

American Equity is also gaining traction within the broker-dealer channel. We have 120 selling agreements with broker-dealers who work through our NMO network. Approximately $200 million of our 2015 sales were through those broker-dealers at American Equity.

Also we know we have registered representatives who sell FIAs as an outside business activity. This business is not tied to a particular broker-dealer, however. We will be placing more emphasis on this channel at American Equity in 2016.

Now I'd like to talk about our Gold Eagles for just a moment. A Gold Eagle agent is someone who produces at least $1 million in premium for the calendar year. Historically this group of agents has been responsible for the high 50s, low 60s percent of our total premium. We find it more effective to focus our marketing efforts on this productive group of agents versus the entire agency force of 30,000-plus. This proved itself again in 2015. We had 1,375 Gold Eagle producers who were responsible for 65% of American Equity's business, a record high.

This group of agents averaged $3.1 million in premium per agent. Even more important, we retained 71% of the 981 Gold Eagle agents from 2014. Our pending application count averaged 6,075 for the fourth quarter of last year. For each month in the quarter the pending count was progressively higher and eventually topped out at 7,127 in late December.

The elevated pending count was due to impending changes in our lifetime income benefit rider for applications received after 2015 and certainly provides a strong foundation for sales in the first quarter. As expected pending has since moderated and today stands at 4,930. One year ago today pending was 3,085.

Finally we're continuing our client appreciations events in 2016. These events are a wonderful opportunity for us to meet our policyholders, share our American Equity story and assure them that our investment portfolio is safe and that we are being good stewards of their money.

Finally and most importantly we get to say thank you. Thank for intrusting us with their retirement money. We do not sell them anything but ourselves.

In 2015 we held 18 events and hosted just shy of 4,000 policyholders and agents. To date we have posted a grand total of 107 events with 23,529 guests.

And with that, that concludes my report. I will turn it back to John.

Thank you, Ron.

Just to put a wrap on the call this morning maybe to get back and focus on some of the big picture things. American Equity certainly owes its success to offering attractive products that meet the needs of Americans either preparing for or enjoying their retirement. Our target market continues to grow as the large baby boomer group enters its retirement years and seeks the safety and security that our principle-protected fixed index annuity products provide.

We've always recognized that our success also depends on taking great care of our distribution partners, our commitment to consistency in our business practices, and providing best in class service has created a strong foundation for more success in the years ahead. And that foundation is the result of the extraordinary commitment that each of our 500 employees brings to our office each day, and I salute and thank each and every one of them for their contributions to our success last year and the years prior to that.

So we are awfully excited and optimistic about our outlook for 2016. There certainly are some challenges these days in that, but we think the future is very bright for fixed index annuities and for American Equity.

So with that we will open up the line to calls from the audience.

(Operator Instructions)

Mark Hughes, SunTrust.

Thank you. Good morning.

Good morning Mark.

The pending count of 4,930 is still up pretty meaningfully year-over-year despite the fact that presumably you had some sales that were pulled ahead into the fourth quarter, and you talked about more competition. Is that kind of an accurate reflection that is still the growth potential here?

Well I think so. I look at our pending for 2015 and I threw out the fourth quarter because the fourth quarter was elevated due to the Lifetime Income Benefit rider changing its provisions. And if I threw out the fourth quarter our pending count for the whole year last year averaged about 4,700. So looking at where it's at today and where it was for most of the year last year I feel pretty good about that.

Right. So are you saying the 4,700 is a more appropriate measure? Isn't there some seasonality that is going to influence that?

Yes. In January historically, if you don't have a big change to your policy form for year-end, January is usually pretty late in then it kind of builds momentum up to tax season, and then you have a big influx around the middle of April and then things kind of taper off again after April is over. But then it starts to rebuild. It just kind of depends on the season and it depends on product introductions and what the competition is doing.

Right. So saying all of that is this not a relatively clean comparison? The 4,900 versus the 3,100?

This is John, Mark. I guess my guess is there's probably still maybe little bit in the 4,900 from year end. We are now almost 45 days away. And actually we have numbers in the file that say how many are 30 days old and 45 and all that.

Quite frankly I haven't studied that closely. But I would guess that there's probably still a little bit of extra residual from the year-end build up.

This doesn't include Eagle Life either, Mark. The numbers that I talked about in pending are only American Equity, and we are seeing Eagle Life have some pretty good pending counts today. Eagle Life spending is over $300 million, which is the highest it's been all year so far.

So your cautionary language, John, around a lot of these factors increase competition. The product design that is kind of a notional warning, you're not necessarily seeing in the marketplace as of yet, if I'm reading these numbers correctly. Is that right?

I suppose that is a reasonable assessment. I think we've been -- we thought it might pull back more than it really has, I think. It is still early in the year. As Ron said some of the competitors have some specials going on right now. I kind of suspect too that the field force is still kind of adjusting to the product changes that all of us made or many of us made on the lifetime income side and that.

So it is probably a little too early to draw any specific conclusions about what we might exceed for the balance of the year.

Right. What is the current new money yield? What are you putting money to work at now?

So far this year I think we've been in the 380 range.

So kind of in line with last year for the most part. The volume for last year, the big increase. What is the spread that you are expecting on those sales? Are they being priced at a 300 basis point spread?

I think we've discussed this issue before. They are still kind of free riding a little bit off of the -- how should we think about what your pricing is on these very new sales?

You were breaking up a little bit there.

I was probably mumbling to. So I apologize.

In terms of our rates we look at a blend of what new investments are providing as well as the fact that some of our portfolio rate is available to support new sales because we don't have to liquidate investments to fund the policy withdrawals.

So our expectations were that we were actually having a rate of in the low 4's to support new sales with a 115 credited rate, I think is where we are at on our bonus goal product these days. And the bonus goal has a 290 spread requirement.

I think the other thing is, we did see, Ron made a comment about the broker-dealer sales for the American Equity independent agent channel, and actually there's a product that came on stream last year that is a non-bonus product. It's the products that are available for Eagle Life to sell and there's companion products in American Equity. And the spread on those products is only 210 as a requirement.

And those were -- that product was like high single digits of our sales last year and so that's reducing -- when we think of the required spread. The measure is coming down a little bit on new business because of the growing acceptance of a non-bonus product.

You had previously made a production about what you expected Eagle Life to look last year. Care to do it again for 2016?

I don't know that we made any projection. I think we said, well if we got the $500 million we would be pretty happy. And we got there.

We're not going to throw out any numbers, but obviously I guess a 10% growth in Eagle Life probably isn't going to make us happy and it's going to be disappointing. I don't know -- I won't throw out a number on the upper end.

Higher.

Higher in 2016.

Could you talk about the portfolio, investment portfolio. I think you'd said there was an additional $358 million at risk. Was that just within the energy sector or did that include other mining in the other potential focus sectors?

That included mining and energy.

Right. And then during the last cycle, during the last recession can you kind of refresh us on how the portfolio performed?

It performed quite well. We didn't have a lot of credit at the time. We had mostly agencies and those agencies were called and that was the time that we repositioned into corporates and aligned it more to a traditional life company portfolio, but we performed, obviously we performed well.

Okay. Thank you.

Steven Schwartz, Raymond James & Associates. Your line is open.

Hello, good morning, everybody. I've got a few as well. John or Ron, what was the change in the LIBOR in December? Where'd you go from to?

We reduced the roll-up interest rate by 1% for all of our benefits. So the 7% roll up went to 6%, the 6.5% went to 5.5%, et cetera.

Okay. And then for Ted, given -- I don't know what to say about sales, but what kind of sales numbers would indicate to you that Hader is not a need to take down the forward?

Steven I think we're going to have to see how that plays out during the year. First of all we actually sold more in 2015 then what we said our high-end production scenario would be. When we were talking about a high production scenario for 2015 we talked about $6 billion. So we obviously exceeded that.

So some of those sales high-end production scenarios that we're talking about. Some of the sales have been front loaded into 2015. As that total sales high-end production scenario showed it was looking like at a scenario of $19 billion over a three-year period of time.

And I think it's probably going to be more towards the middle of the year that we have a real good handle on how much of the $135 million we would need to take in, whether it is all of it or a portion of it. Really dependent on what sales are really and the trends are looking at for 2016.

But based upon what we're seeing right now and what Ron has just commented on it is looking more likely than not that we would be pulling that $135 million in based upon the pending count and what want Ron has just stated.

Okay, thank you for that insight, Ted. Going back to, Ron, could you go back to the LBIR and where you are competitively, where are the products you are talking about? Are they 100 basis points higher?

We look at the LABR we look at it from an income comparison. How far away are we percentage wise from the company that is offering the highest income.

It kind of depends on the age of the annuitant. How long they wait to differ before they turn on income. And what age are they at when they do do that.

But looking at the statistics that I have seen we are probably somewhere between 5% and 8% within the number one company on our income. So we are pretty close and pretty competitive. That is on our male factors.

Our female factors are a little less competitive. We are further off. Those are about 10% off of the number one company in most of the cells.

Just to clarify there is kind of multiple things in the rider that you cannot just cite the roll-up rate as you started with your question, Stephen. For instance we use compound interest. Other companies use simple interest. And then the other factor is the payout factor.

So really you cannot just look at one side of the equation. You got to look at what is the level of income and use whatever the working parts are and each company's rider, because they are not uniform in terms of what companies do to come up with what the relative comparison is.

If you look at the roll-up rate by itself we're right there with everybody else, assuming they are doing compound interest like we are, and then there are some companies that use simple interest, and of course they can talk about higher interest rates because it is simple interest.

Sure. I have read about that. And then Ron, where are you now situated with Advisors Excel?

Well they're still a very good relationship for us. They, I would look at my numbers so far year to date they're our number one marketing company. I have no reason to believe that they are going -- that our relationship is going to deteriorate.

They were the company that sponsors or is the lead company on security benefits income product. I imagine we will lose perhaps some of that business, but since we're as competitive as we are, I think there will be some agents that value our relationship, value our service, and the way that we do business and perhaps stay with us even though security benefit might have a little bit higher income.

And then just one more for you. I understand that some companies have put out no crediting rate product to really enhance the lifetime income benefit rider. Is that something you all are looking at?

No.

All right. Thanks, guys. I appreciate it.

Pablo Singzon, JPMorgan.

Hello. Thank you. Energy and commodity assets have obviously been under pressure in there respective value so thinking of that, however, do have a view in how credit loss ability emerged in your overall portfolio whether in terms of real models or run rate models. Most companies would assume a run rate of about 10 basis points for losses or capital risk.

I'm just wondering if you think a higher level would be appropriate in the current environment. That is my first question.

I think in our corporate model use about 12 basis points as our default or risk number. So I think we are in line with what the industry is. We'll run it under a stress test in our models. We will run at a little bit higher.

But as we see our portfolio you look at the industry as a whole or you look at the market as a whole, and we believe we have weeded out the weaker credits we have what we would consider the higher-quality credits from those factors and as a result we are not going to see near the level of defaults that are being talked about in the market.

Okay. And can you just give a sense of what manages stress tests are you revving. Is it twice the normal level? Three times? I guess your confident what's emerging from those tests.

Our stress test on our individual companies are based on commodity prices and what the impact of those commodity prices at current levels are going to have over an extended period of time. When we are looking at testing the corporate model or risk-based capital we're just using assumptions for example. We have taken $1 billion of BBB assets and moved them to BB assets and that hits RBC in the tune of 9 to 10 basis points.

So we're always testing. We understanding the applications of the potential downgrades to RBC. But on the individual basis on my team we are going in and testing at the raw commodity level the impact that would have on cash flows and obligations to bondholders.

Okay. And that is the basis for, I think you had mentioned 6 bps the plan. 6 or 7 bps. Is that correct?

6 or 7 bps decline would indicate if we saw continuation of current levels on our mining and energy names over the next 12 or plus months then we could see a draft from BBB to BB.

Okay, thank you. And then -- could you please first how you see RBC capital developing over the next year given a number of factors like statutory regeneration, potential credit migration, I think you had spoken to that a bit, your current outlook for sales, I think you had ended the year at [$336 million]. Where do you see that number closer to year end?

You are new to our calls, Pablo, and we do not make projections like that.

Okay. Thank you.

Obviously as Ted commented, we have the $135 million of capital there that would help us in scenarios of elevated sales I guess relative to historical, which goes back prior to last year. And I suppose there is a scenario where sales don't retract from last year and that. And that $135 million starts being stressed in which case we'd look at other options. We don't put out particular forecasts of sales, earnings or RBC.

Okay. Got it. And then the proposal -- I understand that PT 84/24 is not as well-defined as bias, and it's probably therefore harder to prepare for, but I guess I get a sense of that you'll deal with that or recession period, assuming the rules are worse than what you guys are expecting without disrupting your operations significantly. Could you just give me a sense of your thinking right now because it is forthcoming.

You know, and you are right. The concepts in 84/24 were not very well defined and actually they were the subject of the comment letter that we were party to, like provide more clarity on the definition of reasonable compensation and this definition of insurance commission is too narrow and does not fit with all the activities in the marketplace, but I guess my view was and I don't know if we necessarily talked among ourselves, but that the changes resulting from the clarification of those would be things that within 30 to 60 days perhaps even shorter, we could come to grips with as a management team as to what the right things for us to do and then put those in place.

And given the fact that the proposal talked about an eight month timeframe between finalization of the rule and effectiveness, that to me was more than enough time to figure out what changes might be necessary based upon final rule. And I guess also in there might -- there would be more disclosures or perhaps more disclosures, that the agents would have to make the policyholders and we would be helpful in assisting them in doing that, but that wasn't the kind of thing that was going to be any kind of monumental project either.

Right. And in your assessments given your lean operating structure, I guess from where you are at this point you think you'll be able to manage additional disclosure requirements, additional tracking

I don't know that on the company there wasn't much we would have to be careful about making sure that the agents weren't violating whatever they needed to do to be compliant with 84/24. So there wasn't any additional burdens placed on the Company other than wanting to make sure our agents were protected.

And so being as helpful as we could to them to be compliant. Such as a disclosure obligation and obviously not having compensation programs or whatever that we're not going to be compliant with whatever the final rule side.

Okay. In this is less couple of questions as far as a shift in sales and distribution. So maybe just want to get more color on the distributor relationships that you give. I realize that most of the sales are coming from two major ones, about 80%, and you had mentioned couple of others that you brought on board.

Maybe if you could just provide a background in terms of the size of the distributors that you have versus the what penetration number you're looking at, just that we get a sense of obviously (inaudible) sales would grow at a fast pace because you're starting from a low base, but just the initial color and that would be helpful.

Well the relationships that we have at Eagle, one of those relationships is one that we have had for a long, long time and has really embraced our FIA portfolio. Our FIA portfolio at Eagle Life isn't more than a couple of years old so they have embraced that portfolio and we're the benefactor of that.

Actually the other one is a financial institution that is relatively new for us that was really a representative case of when you can get into a financial institution and get a quality product out there it can really escalate -- the sales can escalate rather quickly in those financial institutions and that is the case with the second group that's helping us at Eagle Life.

With that said we are in the process of working some additional relationships. Most of them are the financial institution variety versus the broker-dealer variety. And we think we have a pretty competitive product that they like with competitive participation rates.

And so we are optimistic that we're going to get some good traction in that channel, and that is kind of one of the reasons that I was talking about the lifetime income benefit rider is not as prevalent in that channel and therefore the sensitivity of that income is not a big factor. What is more of a factor is how competitive are your participation rates in your caps, and we're pretty competitive with our products there.

So as we continue to get into some more financial institutions -- and a lot of Pablo is just boots on the ground. Just getting people out of there and getting the training done and developing those relationships, I think is going to boon well for us in 2016.

Got it. And then my last question just in the really serious commentary about (inaudible) market competition the security benefit return to market seems like there are new players. Just wondering, and you guys had provided some discussion of the kind of products you're selling versus anything else, but in terms of the distribution are these new competitors mostly focused on independent agents or are they being addressed as non-agency channels as well?

Are you referring to American Equity or Eagle life?

I am talking about the competitors. So I think Security Benefit is one of them and there is a reference of a new entrant in the quarter. I was just wondering if these companies are expanding share in independent agents. I assume that most of them are but to the extent that there are companies trying to gain share in banks and producers as well I would be interested to hear about that.

There are some that crossover that are in the bank and broker dealer channel, and there are some that are more in the line of the independent agent channel. American equity at this point according to the statistics is the number one company in the independent agent channel and we are gaining more traction in the bank and broker-dealer channels.

But there are companies that are kind of like us that are both channels, but some are more prominent in one than the other.

Okay. That is all I had. Thank you.

Kenneth Lee, Royal Bank of Canada.

Thanks for taking my question. Just want to quickly follow-up on Pablo's question if I can, just in terms of the RBC ratio sensitivity. You mentioned there was a 6 or 7 percentage point sensitivity for energy-grade securities. Is that sort of linear in that there's one or two notches we should extrapolate that way?

I'm not sure I follow your question, Ken.

Not completely. It is not linear in that analysis and the investment department did that there are things that they have going from an NEIC 2 to a 3 or a 3 to a 4. I think the other sensitivity that he gave you -- so I wouldn't use that as linear.

Now the sensitivity that Jeff talked about is just at a really high level theoretically if you had $1 billion of corporate securities that moved from a 2 to a 3, the effect on RBC because of the increased RBC charges or capital charges would be approximately 10 or 11 basis points.

Got you. And then related to that in terms of how the Company determines other-than-temporary impairments how do like market prices or credit ratings factor into that process?

They are all factors. There are multiple factors that you look at. You look at the length of time and the extent that the security's fair value has been below cost. You look at whether the issue was current on all payments and contractual interest that is due to you.

And one of the main things from all insurance companies is your intent. Do you have an intent to sell or do you have an intent to hold until the security recovers?

And as most insurance companies like us, we have an intent to hold these securities to maturity and so that is one of the other driving factors. Rating agency actions is certainly another indicator of an impairment and you have to look at that and what the reason that are causing that.

But anyone of those -- a rating agency factor or change or a decrease in the fair value of the security below cost those individually do not get companies to arrive if there's an impairment. You really have to go through the whole process and look at are you expecting to recover all of your money or not.

Got you. Great. Just one final question, just curious about the holding of the higher than average short-term assets in the fourth quarter and cash as well. Was this just a timing issue and if so, what was the main driver of that?

It is a timing issue. It gets to the flow of funds that are coming in and the availabilities of securities that meet the risk parameters and credit quality that we are looking at in the yield targets that we are looking for.

So historically and over the last several quarters we don't want the investment department stretching and buying things that we would not want in the portfolio. So we are willing to temporarily hold excess cash and short-term investments for short periods of time to allow us to be able to invest those funds long-term appropriately.

Okay. Great. That is all I have. Thank you very much.

Randy Binner, FRB Capital Markets.

Hello, thanks. I had a question on back to the energy portfolio. Jeff, is there any way that you can characterize how that unrealized gain of $305 million may have -- so this is the $305 million unrealized loss, I just misspoke on the $3 billion amortized cost energy portfolio. How much bigger has that unrealized loss gotten year to date roughly?

We don't have market prices as of yet so we I cannot tell you exactly. There is a general widening overall in the market. Some of it is coming because of treasuries rallying and securities holding still. But I cannot give you an exact number at this point in time.

In the -- Ted went through a scenario where you had some below investment-grade drift risk in the energy portfolio and I think you sized that at $305 million. I don't believe that is a number that is in the sub. So just want to confirm that I got that right.

That you all did an analysis of $350 million of that $3 billion portfolio, I assume those would be BBB's that go to below investment-grade. If it got that right what subcategory are those mostly in or what characteristic do those bonds have a risk of being downgraded?

$305 million is not the right number. I think in the sensitivity test that Jeff's area and the financial area ran was looking at the energy and mining and metals sector and I think there was about $447 million of securities that they identified for potential ratings drift. And then the effects of those drifting and ratings was the 6 bps that Jeff quoted before on the effective RBC.

And the details of those securities and what those are I'll let Jeff responded to that.

They come up in different sectors. And we rate them. What we put in that $447 million are securities that we believe have a higher probability and then those that are on the fence that we don't know.

So we think we're taking the conservative view when we are looking at making those assignments, and we're also using the assumption that oil stays between $30 and $35 for the next 12 months and that commodity prices for iron, zinc, copper all remain basically flat for the next two years. So I don't thin we're being unrealistic when you start looking at forecasts for commodity prices.

We're already seeing gold, zinc, some of the industrial metals up 8% to 10% so far this year. Clearly that is a tailwind for our analysis. Oil on the other hand has drifted lower but I do think when we look at market forecasts, a lot of the key market forecasters are showing oil well above the $30, $35 by the time we get to year-end as that supply-demand imbalance starts to ease.

So overall I think we are being conservative on those numbers. We have gone through and looked at them very closely. And the areas -- as I look at our portfolio the high risk areas that people note are the oil services and then those are companies that we own are Schlumberger and Halliburton and Baker Hughes and National Oil Well.

Those of the companies that are not necessarily ones that are at high risk. The ones that are high risk are the smaller organizations. The smaller mom and pops that really cannot operate at a low oil cost structure where these companies have been through multiple cycles. They are solid companies.

That is our high risk sector You look at our low risk sectors such as our mid-streams. Those are natural gas pipeline companies that are interstate pipelines at long-term contracts that are on volume, and right now natural gas volume is extremely high. These companies have great cash flows. And that's $700 million of our exposure.

Our refiners, those are all doing quite well because refining volume is up. Two big sectors of our portfolio really are not even in consideration.

Then you start looking at our integratives which are the highest quality of our portfolio. They Royal Dansk, BP, Exxon, Chevron, Mobile. These are names that are going to be around regardless of what the cycle is. They can weather the downturn.

So when we are looking at the portfolio we've come down in isolated companies that we think are higher at risk which is our -- they have a couple of small drillers like a Devon and Weatherford that potentially could be downgraded. Those are ones that we are looking at -- these are two companies also that are very strong and well respected in the drilling circles. So I think we been conservative as we've looked at our portfolio.

We've stayed on high-quality names. We stayed on names that are less susceptible to day-to-day movements in oil prices, and I think we are going to be positioned just fine as we go through this.

That's helpful. I just wanted to clean up the question because I missed it in all of the conversations. But you all gave a pending count that was 4,930 as of the end of the quarter -- I thought the end of the quarter was 7,000, so that was like today or when was that number for?

The number I quoted of 4,930 was today.

And then the only other number you gave out was the 7,000 at year-end.

7,127 was the highest that we got to towards the end of December. For the fourth quarter the average was 6,075.

6,075 for 4Q. Okay. I got it. Thanks a lot.

Erik Bass, Citigroup.

Hello. Thank you. Just wanted to get a sense on your RBC targets. I think you've talked about wanting to be at 325 as the minimum. But what sort of flexibility do you have to go below that level from the rating agencies?

325 is not necessary a minimum. 325 was a trigger for us to be considering what we were doing or what we should be doing in regards to a capital raise or increasing our capital ratios.

With A.M. Best, they have always stated their threshold for A minus rating was 300 RBC. S&P that is a little bit more of a fluid number. There's not really a hard and fast RBC number associated with that.

Got it. That is helpful. And then you'd alluded to some other potential sources of capital that you could use if sales volumes remain strong and you needed to tap it. I'm assuming would that be things like coinsurance, increasing the use there, or what else are some of the other kind of tools you have in the toolkit there?

So our other tools outside of if sales would accelerate and stress the $135 million that we have available under the two forward sales agreements in addition to that we do have debt capacity. Our debt ratio on an adjusted debt to level, adjusted debt to equity cap is below the 20% threshold that we have targeted.

So we do have some debt capacity there. We have a $140 million line of credit that is available to us that we have nothing drawn upon that we can draw upon. And then there is also always reinsurance out there.

There continue to be several parties out there that are hungry for reinsurance business and call on us regularly. And as we have in our past history we have utilized reinsurance effectively to manage our capital.

Got it. That is helpful. And then on the reinsurance is it something where you have agreements outstanding that you could tap readily or would it need to be new agreements put in place.

It would be a new agreement.

Got it. Thank you.

(Operator Instructions)

John Barnidge, Sandler O'Neill.

Thank you. Just a question on sales, how much of the increase in sales is coming from people coming to dues on fixed index annuities in your mind in a competitive environment.

(Laughter) We don't have exit surveys they just buy the policies, John, I don't think that we can honestly answer that.

Okay. And it sounds like you are leaning towards settling that forward sale agreement. And given increased competition along with where you share price is currently trading, and then coinsurance and debt issuance you have available, have you given any thought to repurchasing shares?

No. We have given thought to it but we have advanced no plans that would say do something. The capital that is available there is there to support growth, so I suppose halfway through the year as we make an evaluation of the $135 million for half, and if it is not needed for sales perhaps a consideration of a share repurchase might enter our mind.

But I don't think we want to use up any of our capital capacity at this point in time. On share repurchase. Even though obviously that conceivably would be the price is attractive.

Okay. And then the increased competition that you are starting to see, are you seeing from any writers that historically may be doing VA that are shifting over to the fixed market just because of the pending DOL rule?

That is a possibility. When we look at, for example, Lincoln is in the FIA business. Of course Alianse has always been in our business, but they also are in the VA side too. American General I think is in the VA side.

But we haven't seen any significant players other than ones that I've mentioned start to migrate into our business. I guess Nationwide was one that made a big splash in the market last year.

All right. My last question, about a week ago there was HR 4293 and 4294 that passed the House panel that would replace the DOL rule before it even goes into effect. Do you have any thoughts on that potential success or what the industry might do if the OMB doesn't approve the final ruling?

We don't project annuity sales but know that, and we certainly don't want to handicap the political process. I guess I see the rhetoric out there that the House has passed. It may not even come up in the Senate.

The President is going to veto it. So I guess from my perspective it is an interesting political exercise. But I guess I just don't see anything at the moment that says it's got any legs to it.

All right. Thank you and good luck going forward this year.

Thanks, John.

Thank you, and that does conclude our Q&A session for today. I would now like to turn the call back over to Julie LaFollette for any further remarks.

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

Thank you, ladies and gentlemen, that does conclude our Q&A session -- our conference call for today. You may all disconnect. Everyone have a great day.