American Equity Investment Life Holding's CEO Discusses Q1 2014 Results - Earnings Call Transcript

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 |  About: American Equity Investment Life Holding Company (AEL)
by: SA Transcripts

American Equity Investment Life Holding Company (NYSE:AEL)

Q1 2014 Earnings Conference Call

May 1, 2014 11:00 AM ET

Executives

Julie L. LaFollette – Director-Investor Relations

John M. Matovina – President and Chief Executive Officer

Ted M. Johnson – Chief Financial Officer and Treasurer

Ronald J. Grensteiner – President-American Equity Investment Life Insurance Company

Analysts

Alan Mark Finkelstein – Evercore Partners

Mark D. Hughes – SunTrust Robinson Humphrey, Inc.

Steven David Schwartz – Raymond James & Associates, Inc.

Operator

Welcome to the American Equity Investment Life Holding Company’s First Quarter 2014 Conference Call. At this time, for opening remarks and introductions, I would like to turn the call over to Julie LaFollette, Director of Investor Relations. Please proceed.

Julie L. LaFollette

Good morning and welcome to American Equity Investment Life Holding Company’s conference call to discuss first 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. It is now my pleasure to introduce John Matovina.

John M. Matovina

Thank you, Julie. Good morning, everyone, and thank you for joining us this morning. Before we get into the results, as we’ve done the last couple of quarters, I want to share with you some information on how our policyholders did. After all, we’re in business to meet their needs. And the policyholders did do well again, in the first quarter.

The average index credit earned by our policyholders who had an anniversary in the first quarter was just under 6% at 5.83, and the largest index credit in the quarter was almost 20%. So, as I say, meeting the needs of the policyholders by offering upside participation at low risk is one of the reasons American Equity has been so successful over the years, and this is the value proposition that still drives our business today. When we get back to Ron’s part of the call, he’ll share some additional details with you on the policyholder results.

So, now let me move on to the results for shareholders this quarter. This quarter, our operating earnings were $37.4 million, that’s up 12% year-over-year, and that translates into earnings per share, or operating earnings per share of $0.47. That was a very solid performance in our view, considering our higher stock price contributed to a 16% increase in our diluted share count compared to the first quarter of 2013.

On a trailing 12-month basis, our operating earnings represent a return on average equity of 12.13%, excluding the impact of unlocking that we typically get in at least one quarter in a 12-month period. Our investment spread for the quarter was up 4 basis points to 2.77. Ted will discuss the details of that spread in his remarks, including the improvement in our hedging results and the reductions in crediting rates, and he’ll also discuss in detail the crediting rate reductions that went into effect, or are going into effect initially about two or three – two weeks ago. Our attractive product attributes and our excellent customer service, both to our distribution partners and policyholders, resulted in $921 million of sales this quarter.

This is essentially the same amount as the first quarter of 2013. And as we’ve said in the past, we’re committed to disciplined pricing. we’re not going to pursue sales and market share growth at the expense of acceptable profits, but we do want to maintain and grow our quarterly sales and intend to maintain an active presence in the marketplace.

The market is quite competitive these days, with a lot of attention directed toward potential product returns rather than the guarantees and protection of principal. And as usual, Ron’s remarks will include commentary about sales results in the competitive environments.

Finally, we continue to improve our capital structure and reduce our debt leverage by deploying more of the proceeds from our $400 million of eight-year senior notes that we issued last July to retire our outstanding convertible debt. We retired an additional $31 million of the 5.25% notes in the first quarter and already this quarter have retired another $34 million of convertible notes, most of those were the 3.5% notes. This brings our total retirements to $221 million and leaves us with $95 million of principal amount of the notes outstanding.

We’ve got some disclosures in the capitalization book value page of the supplement – financial supplement for this quarter that shows you the pro forma effects of those April transactions. And Ted will have some additional details on the financial outcome of the convertible debt retirements.

So with that, let me turn the call over to Ted for some additional commentary on our operating results.

Ted M. Johnson

Thank you, John. Our first quarter operating income was $37.5 million, or $0.47 per diluted share, compared to $33.5 million or $0.49 per diluted share for the first quarter of 2013. The results include a 15.8% increase in diluted share count, which equates to $0.075 per share. The increase in the diluted shares was due to shares issued since the first quarter of 2013, for retirement of convertible notes and exercise of stock options. In addition, there was a greater dilution from convertible notes, warrants and stock options outstanding due to the company’s common stock being in a much higher price than the first quarter of 2014, compared to the first quarter of 2013.

Our first quarter operating income decreased 5.9%, compared to fourth quarter of 2014 operating income of $39.8 million, or $0.50 per diluted share. The increase in investment spread this quarter was offset by declines in surrender charges and fees and while interest expense and operating expenses decreased, they were partially offset by an increase in amortization.

Investment spread for the first quarter was 277 basis points, and total invested assets at the end of the first quarter were $32 billion. Our spread result of 277 basis points was 4 basis points higher than the previous quarter’s spread of 273 basis points. Spread performance was impacted by average yield on investments, which declined 2 basis points when compared to the fourth quarter due to investment of new premiums and portfolio cash flows at rates below the portfolio rate.

The average yield on invested assets was 4.95% for the first quarter, while the average yield on fixed-income securities purchased and commercial mortgage loans funded was 4.39%. The aggregate cost of money for annuity liabilities was 2.18% in the first quarter, compared to 2.24% in the fourth quarter. The company continued to reduce its cost of money through lower crediting rates and the 6 basis point reduction in the aggregate cost of money also benefited from an improvement in hedging results. We were less than 1 basis point under-hedged in the first quarter and 3 basis points under-hedged in the fourth quarter.

Historically, we have managed that process toward an over-hedged outcome. However, policyholder behavior does not always match our expectations, and occasionally we do have a quarter where we are under under-hedged. The modest variances for the last two quarters translate into 99% hedging effectiveness. We have been implementing crediting rate adjustments to small groups of policies for some time now, and policies issued in the first quarter of 2011 were adjusted for the first time since their issue dates this quarter.

In general, the crediting rate reduction for these policies was 15 basis points and these reductions would have accounted for a substantial portion of the 3 basis point reduction from lower crediting rates that we achieved in the first quarter. We expect similar reductions in the next two quarters from initial renewal rate adjustments to policies issued in the second and third quarters of 2011.

In addition, earlier this quarter, we initiated additional renewal crediting rate reductions for policies issued prior to July 20, 2010. These rate reductions will occur on policy anniversary dates over a 15-month period that began on April 14, 2014, with the majority of the rate reductions to be completed by May 15, 2013. When fully implemented, we estimate that the cost of money for approximately $15 billion of policyholder funds will be reduced by 20 basis points.

During the first quarter, we purchased $935 million of new fixed income securities at an average yield of 4.34%, and we funded $121 million of new commercial mortgage loans at an average yield of 4.78%. The majority of the security purchases were predominantly investment grade corporate bonds with an average yield of 4.42%. We purchased $186 million of commercial mortgage-backed securities with an average yield of 4.5%.

Annuity product charges for the first quarter of $25.3 million, or $3.8 million more than the first quarter of 2013, but $6.9 million less than the fourth quarter. The increase relative to first quarter 2013 was generally attributable to a larger volume of business in force.

Annuity product charges in the fourth quarter included $4.7 million of surrender charges deducted from California policyholders, surrendering their policies as a condition of receiving certain benefits in a national class action lawsuit settlement. Due to seasonality, lifetime income benefit rider fees in the fourth quarter were $4.1 million greater than they were this quarter.

Interest expense for notes payable was $10.3 million, compared to $11.9 million in the fourth quarter and $7.2 million in the first quarter of 2013. The decline from fourth quarter is due to the retirement of convertible notes in the first quarter and the fourth quarter.

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

Other operating costs and expenses were $19.1 million, compared to $26.9 million in fourth quarter and $19.5 million in the first quarter of 2013. The comparability of these amounts is impacted by amounts for the settlement of the McCormick litigation. First quarter 2014 operating expenses includes a net benefit of $2.2 million associated with this litigation settlement from recognizing a decrease in the estimated class action litigation reserve based upon developments in the claims process.

Fourth quarter operating expenses included a $4.2 million expense associated with the McCormick litigation settlement, of which $3.7 million was an increase in the estimated class action litigation reserve based upon developments in the claims process; and $500,000 was third-party cost incurred in the fourth quarter associated with the administration of this settlement.

Consistent with our prior reporting, amounts for class action litigation settlements are excluded from our operating earnings. Excluding this item, operating expenses for the first quarter were $1.3 million less than the fourth quarter and $1.8 million higher than the first quarter of 2013. Compensation expense tied to our stock price decreased by $800,000 in the first quarter, compared to the fourth quarter due to a decrease in the value of our stock.

As John commented earlier, during the first quarter, we continued to improve our capital structure by reducing our debt leverage and eliminating potential additional dilution from further increases in our stock price through the retirement of additional convertible notes. After retiring $156 million of aggregate principal amount of our two outstanding convertible debt instruments in the fourth quarter, we retired $31 million aggregate principal amount of our 5.25% convertible notes due 2029 in the first quarter.

The total consideration we paid included $54.6 million of cash and 947,000 shares of our common stock. We estimate that these convertible debt retirements reduced book value per share, excluding AOCI by $0.50 per share during the first quarter. As I commented in the last three quarterly conference calls, unlike diluted earnings per share, there is not an established accounting protocol for determining the diluted book value per share, and the book value per share numbers we report do not include any potential dilution from convertible securities and stock options.

With our stock price trading significantly higher than the conversion price and the conversion price significantly below reported book value per share, potential further reduction in book value per share from conversions or retirements of our convertible notes could be meaningful.

At March 31, 2014, the aggregate principal amount of convertible notes outstanding was $129 million and we had $151 million of net proceeds remaining from the $400 million July 2013 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 can be no assurance that any such transactions can be completed prior to the December 2014 call date for the 5.25% convertible notes or the September 2015 maturity date for the 3.5% convertible notes.

In April 2014, we retired $35.5 million principal amount of our 3.5% convertible notes due 2015, and $1.9 million principal amount of our 5.25% convertible notes due 2029. The consideration paid for these retirements included $37.8 million of cash, and 1.2 million shares of our common stock. The pro forma impact of these transactions on our capitalization and book value per share is reported in our financial supplement for the first quarter. We estimate that these convertible debt retirements, reduced book value per share excluding AOCI by $0.27 per share. Our RBC at the end of the first quarter was estimated at 351%, up from 344% at the end of 2013.

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

Ronald J. Grensteiner

Thank you, Ted. Good morning, everyone. Before I speak to sales and production, I’d like to make a few comments about the value proposition of our products. As you heard in John’s remarks, this value proposition was evident again, in the first quarter, with the average annual index credit posted to policies with an anniversary in the first quarter at 5.83% and a maximum index credit of nearly 20%. This extends the string of better-than-average annual index credit to eight quarters, approximately 43% of the annual index credits posted were 6% or more, approximately 80% of the credits were 4% or more and about 90% of the annual index credits were 3% or more. So, not too shabby for a safe-money product.

First quarter sales were $921 million, basically flat compared to $930 million of the first quarter of 2013. The sales pipeline is usually pretty empty at the beginning of the year, as producers take some time off during year end. And then it fills back up again, to April 15, when it takes another little rest. This year, pending bottomed out, about 2,277 in mid-January, and it has worked its way back, bouncing around 3,100 today. A year ago, pending was around 3,300.

The competition has been really hungry this year going back to the fourth quarter of last year. The trend today is offering fixed-index annuities with unconventional indexing strategies that are being marketed with uncapped interest. In reality, these indexes are capped; but in lieu of a stated cap or participation rate, the index uses a volatility control feature to limit the highs and the lows of the index then deduct a fee from the calculation to determine the actual interest credit.

In our view, this volatility control feature operates more like averaging for more predictable interest credits, not necessarily higher index credits. Furthermore, hypothetical consumer illustrations are used to sell these products with up to 25 years of historical index performance on products that were not available during that time, and they are assuming current fee structures. The bottom line is that these indexes are placing a lot of emphasis on high accumulation and setting unrealistic interest expectations for the consumer.

We’ve done a lot of research on these types of strategies, but have steered clear at this point. We are concerned that an uncommon index marketed as uncapped could potentially lead to consumer confusion, complaints and litigation when, realistically, we’re not sure if these credited interest strategies will credit much more interest than our current product line.

We will, however, continue to do our research, and if we introduce our own volatility control index, it will be transparent, it will be easily trackable, and we will set reasonable interest credit expectations for our consumers. When we look at the fourth quarter of 2013 for industry statistics, the most recent data available the leading fixed-annuity carrier increased sales by 78% over the third quarter of 2013.

The number two carrier had a 3.6% reduction in sales, and American Equity had a 2.7% increase. Given that we think the first quarter of this year will have similar results. we feel good that we’re holding our own by focusing on proven product structure and guaranteed income. Also, as I mentioned earlier, we can tout actual, not hypothetical, interest credit rates of 5.83% in the first quarter.

Our ace in the hole – our outstanding customer service reputation continues to be a difference-maker. We’ve had some producers leave temporarily to sell the uncapped strategies with other companies, but returned when they find the competition doesn’t given then excellent treatment like American Equity. We’re also in the middle of the sales incentive that we started in March, and we will have it run through June. We typically have some sort of sales incentive program this type of year for a little extra sales boost.

Switching to progress at Eagle Life, we finished 2013 with over $21 million in sales for the first quarter this year; Eagle finished with $17.4 million. We currently have 11 BDs and one bank, with three more banks close to signing. Last week, we got a verbal commitment from a very big company that we’ve been working on several months. We don’t have any ink yet on a contract.

The timeframe for getting a selling agreement inked to the first annuity application does take longer in this distribution channel that compared to the independent agent channel, so I’m finding that patience is definitely a virtue. We are optimistic for Eagle Life's future, as FIA products seem to be gaining credibility within the bank and broker-dealer channels. As an example, in the fourth quarter of 2012, banks represented 6.5% of the FIA market share. A year later in the fourth quarter of 2013, they represented 11.5% of the market share. Broker-dealers also saw market share increases during that timeframe from 1.2% to 2.6%.

Turning to our Gold Eagle program, to refresh your memory, a Gold Eagle agent is one who writes at least $1 million in paid annuity premiums during the calendar year. We pay extra close attention to these producers, as it’s much easier to market to and build relationships with a known smaller group of producers rather than trying to engage with the entire agency force. Our efforts of focusing on our Gold Eagle members is paying dividends. Last year, we had 1,044 Gold Eagle producers who are responsible for 61% of our total production, an all-time high.

We were also able to retain 67% of our Gold Eagle members from 2012. One of the benefits of our Gold Eagle membership is that the producers will get unvested American Equity restricted stock. This is truly a unique benefit in our industry, where our producers have an opportunity to enjoy ownership in our great American success story, even more so when they’ve seen our stock appreciate over the last couple of years.

Through the first quarter of this year, we have 153 Gold Eagle members, compared to 159 in the first quarter of last year. We had a very successful Gold Eagle producer forum in March with about 500 total attendees. This is one of our two opportunities per year to get with our core producers and share American Equity information and to strengthen those relationships. Five of our top 10 producers spoke, as well as some industry experts. We had rave reviews, and this is perhaps, our best program to date. I say that every year, but I think this year I really mean it.

Our goal is to retain 17% of those producer forum attendees as Gold Eagle members in 2014. Another relationship-building effort that’s unique to American Equity is that our senior management team visits our top marketing companies in the first quarter. This is our way of capping the previous year and planning for the current year. In addition, if they’ve earned a commission bonus from the previous year, we like to personally deliver those checks at this time. And in the first quarter, we visited 15 of our top marketing companies.

Of course, I always need to talk about our very special client-appreciation events. This is where our home office team travels to major cities and gathers with our policyholders and Gold Eagle producers for a special luncheon. We talk about our history; we talk about rock-solid financials and the ABCs of fixed annuities. The most important thing that we do is, say thank you for entrusting us with their money. We were in Texas last week, where we hosted another 400 policyholders. It’s common for us to receive a card or e-mail from one of the attendees after the event, and I received one this week, which I want to read to you in part.

“Our minds were apprehensive about our money. But after hearing from Ron and getting the facts straight from the president, we were totally convinced we have made the right investment”. And that is the very reason we hold these events.

And that concludes my report, and I’ll turn it back over to John.

John M. Matovina

Thank you, Ron and Ted. So to wrap up the call and before questions, Dave Noble said in our – in the earnings release, our first quarter financial performance gets 2014 off to a solid start. We remain well positioned to continue to capitalize on the growing demand for the retirement savings and retirement income products that we sell. And while the sales environment for our product remains competitive, we are optimistic that we’re going to have another successful and rewarding year.

Summarizing the four key objectives that I laid out in the last call for this year, we do want to continue to grow invested assets and policyholder funds under management by more than 10%. And more specifically, we want to get back to that $1 billion a quarter sales level that we had for the last three quarters of last year, and then as well, see measurable progress on the sales side from Eagle Life. We want to continue to generate double-digit operating return on average equity, and, more specifically here, that’s where the spread comes in.

We remain committed to getting back to that 3% target rate. It goes without saying that the portfolio yield these days in the rate environment is under pressure from lower reinvestment rates. And that means that even with the substantial rate reductions that are now in process, we’re going to have to find more, and we’ll be looking for those over the course of the next several weeks.

We want to maintain a high-quality investment portfolio with minimum credit loss; that’s been part of the 20-year history of American Equity. And then finally, improve our financial profile by reducing our debt leverage. And in there, the measurement is the S&P adjusted debt-to-capital ratio, which declined from 25.8% at year-end to 25% at March 31. And our goal is to get that down to much closer or below 20% by year-end, and the additional convertible debt retirements will go a long way toward that.

So with that, we’ll open the call up to questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Mark Finkelstein with Evercore. Please proceed.

Alan Mark Finkelstein – Evercore Partners

Hi, good morning. I do want to talk about spreads a little bit. And I guess I’m a little confused on the strategy, I guess to reinstate spreads. And I guess – I’ll ask the question this way. You have a target of getting to 300 basis points. I think originally, it was end of 2014; then it kind of – first quarter of 2015; maybe, it slipped a little further from there. But I guess, the real core question I have is why just the $15 billion are you tackling above and beyond the – I guess the 2011 block. But why not the entire block? And what isn’t implicit in the assumption that you need to see happen without further repricing to get to the 3%?

John M. Matovina

Well, the $15 billion in the older block, Mark, is policies are likely furthest away from guaranteed minimums and also furthest away from current rates. For instance, policies issued in the last couple of years – there’s actually some policies issued at rates below current rates. So realistically, you can’t reduce those people. There are policies that were issued going back a couple of years ago that are – that were issued at the same rates we’re offering today. And so that does narrow the book of business, in our view, of what can be adjusted.

Alan Mark Finkelstein – Evercore Partners

Let me ask it this way. Based on what you’ve done or committed to do on the $15 billion that starts April 15 and then the 2011 block, based on what you’ve done and how you think that this should evolve. If you don’t assume any increase in interest rates, where would that spread get to?

John M. Matovina

285 to 290

Alan Mark Finkelstein – Evercore Partners

And that’s kind of second quarter of 2015, basically, right around in there?

John M. Matovina

By that time. I mean, the bulk of the adjustments that are going in were – they started in April. By the time, we get to December; a big chunk of that group will have been dealt with, and just kind of given the historical – I don’t want to say our business is seasonal, but we’ve been talking about the fact that first quarter business is typically less than any other quarter.

So the balance of that that has to come through from policies that are going to have anniversaries in the first quarter of 2015 is not going to be one fourth of the total. It might be 20% of the total or maybe even a little bit less than that. I don’t know what the skew of the business is, but other than – there’s more business – there’s more than 75% of the business in the last three quarters of the year, and the first quarter is never 25% of a year’s business.

Alan Mark Finkelstein – Evercore Partners

Okay. And then I guess maybe, just following up on that is, if you get to 285%, 290% in a flattish rate environment – so that's 10 bips to 15 bips below kind of the target – is there transparency to further actions, notwithstanding kind of a little bit more challenging in the remainder of the blocks, or is it really driven by the need for interest rates to steadily climb?

John M. Matovina

I think if rates stay flat from here, that does put the reinvestment pressure on, and it makes the job a lot tougher. And perhaps, the best we can accomplish in that environment is doing enough adjustments to prevent further erosion and maybe, some modest expansion.

Alan Mark Finkelstein – Evercore Partners

Okay. I guess…

John M. Matovina

And the longer that environment persists, should it persist for an extended period of time, that does probably put on the table, then, policies issued recently at current rates, which was my first kind of answer to your question, I said we were sort of keeping those out of the universe. But an extended – further extension of this rate environment would bring those policies into consideration.

Alan Mark Finkelstein – Evercore Partners

Okay. That’s very helpful. Ted, you got some more repurchases of the notes done in April. Any transparency to more activities through remainder of the second quarter?

Ted M. Johnson

We are committed to continue to retire additional both [amounts] (ph) as those transactions are presented to us, and we feel confident that we should be able to retire additional notes as we go forward prior to the maturity dates. But there’s no guarantees on that.

Alan Mark Finkelstein – Evercore Partners

Okay. All right. Thank you.

Operator

Your next question comes from the line of Mark Hughes with SunTrust. Please proceed.

Mark D. Hughes – SunTrust Robinson Humphrey, Inc.

Thank you, good morning. I was curious whether the enthusiasm for these uncapped products – do you think it’s still building momentum through the first quarter, or is it – have the uncapped products taken the share they’re going to take and so it’s more of a stable environment, or is this thing still evolving?

Ronald J. Grensteiner

I don’t know, Mark. There’s only a handful of companies that have them. We haven’t heard of any new companies in the first quarter. I guess perhaps F&G was the most recent company to introduce an uncapped strategy. We don’t know of other companies that have got them filed on that. Probably all doing their research like we are and perhaps, they’re coming to similar conclusions that we are. So if it continues to go or not, that’s really an unknown at this point. All we can do is continue to educate, continue to explore and keep things in perspective. We always talk about, hey; we’re in the safe-money business. When you start talking about uncapped strategies, what are you really trying to compete with? So we’d always try to put a grain of education in there, as we talk about these types of topics, too.

Mark D. Hughes – SunTrust Robinson Humphrey, Inc.

Right. But presumably, you could have an uncapped product that would be part of your portfolio, and for the clients who prefer that, you would emphasize that the dynamics are not much different than your other products. But if, for whatever reason it appeals to certain clientele, then is there some other reason other than that tone or education – a point that you would not offer those uncapped products?

Ronald J. Grensteiner

Well, I guess it kind of depends on the balance of the year. It’s one of those things at this stage in the game, I would prefer not to get into that strategy, only because I think when you talk about uncapped, it is somewhat misleading. So if we did have that type of strategy, we would not market it as uncapped. We would probably say it’s providing more say, predictable interest credit where the highs aren’t as high and the lows aren’t as low. And our strategy might be along the lines of you tell us what the market is going to do and we’ll tell you what strategy to use. Where if you think the market is going to skyrocket, our monthly point-to-point strategy would beat the bejesus out of this volatility control. And if the market is pretty flat, it could be a toss-up. So we try to educate as we go, and if we have one, we want to be transparent with it.

Mark D. Hughes – SunTrust Robinson Humphrey, Inc.

Okay. And then any update in terms of the target sales through the bank and broker-dealer channel? You’ve got a big relationship that’s in the offering here. Do you get more optimistic about the sales through that channel?

Ronald J. Grensteiner

We do. We think that the banking channel and the broker-dealer channel is becoming more accepting of fixed-indexed annuities. As we look at Eagle Life at this stage, we have – probably most of the business is coming through banks, and most of that is multi-year guaranteed business versus FIAs. But that’s kind of an entrée in the banks. They want to start with MYGA products, or multi-year guaranteed products; and once we get in the banks with those products, they kind of – they start to look more at your fixed-indexed annuities.

Mark D. Hughes – SunTrust Robinson Humphrey, Inc.

Are you more optimistic today than you were three months ago?

Ted M. Johnson

Yes.

Mark D. Hughes – SunTrust Robinson Humphrey, Inc.

You’re not just saying that, are you?

Ronald J. Grensteiner

Yes. No, we feel good about Eagle Life. The thing that’s – it’s the patience thing. We are an independent channel; you have one person that you have to convince to sell your product. In the bank and broker dealer channel, it seems like everything is done by committee. And you got to get your company approved by committee and then you got to the products approved by committee. It’s just a process, but we think it will come.

Mark D. Hughes – SunTrust Robinson Humphrey, Inc.

Thank you.

Operator

(Operator Instructions) Your next question comes from the line of Steven Schwartz with Raymond & Associates. Please proceed.

Steven David Schwartz – Raymond James & Associates, Inc.

Hey, good morning, everybody. Just so I’m clear here, how much was – is the block of the 2011s, and how much is the block of the 2010 being reduced?

Ronald J. Grensteiner

The 2010 block is the 50 – well, it’s 2010 and prior.

Steven David Schwartz – Raymond James & Associates, Inc.

Right.

Ronald J. Grensteiner

It’s $15 billion.

Steven David Schwartz – Raymond James & Associates, Inc.

Okay.

Ronald J. Grensteiner

The 2011, the group that’s still going through is policies issued between – the total group was January – roughly January 1, 2011 through October 10, 2011. So three quarters of sales – I’m trying to come up with a number here, Steven, because I don’t have the specifics in front of me. But 2011 was $5 billion of sales for the whole year. So the fourth quarter was a pretty big one. So that total – that actually – we’re just talking about second and third quarters. So it’s more than $2 billion, maybe not quite $2.5 billion. Maybe, even a little more than $2.5 billion; second and third quarters of 2011, or $1.25 billion each. That’s the number we have to work.

Steven David Schwartz – Raymond James & Associates, Inc.

Okay. Ted, on McCormick, were you saying that $4.7 million of surrender – what would have been surrender charge were forgone?

Ted M. Johnson

No.

Steven David Schwartz – Raymond James & Associates, Inc.

But there was an offset.

Ted M. Johnson

Yes. Last quarter, our fourth quarter, we had an extra surrender charges collected due to the California policyholders surrendering, that we collected a $4.7 million. That was kind of a one-time event. So that’s kind of the – one of the reasons for the decrease that you see in surrender charges from last quarter to this quarter.

Steven David Schwartz – Raymond James & Associates, Inc.

Okay. I did not get this down properly. Okay, thanks. And then last the – are these tied together, the indices as well as the volatility control? For example, the Trader Vic Index. Those products, is there volatility control on top of those, or are we talking about really two different things here, two different types of products?

Ron Grensteiner

I’m not sure I – go ahead, John.

John M. Matovina

I think they come in both styles, Steven. We’ve heard about both and some of it the volatility control type mechanism is embedded in the index and there’s nothing on top of it. Some of them have an index with the volatility control overlaid on top of that.

Steven David Schwartz – Raymond James & Associates, Inc.

Okay, all right. Okay, that’s what I wanted to know. I appreciate it.

Operator

There are no further questions in queue at this time.

Julie L. LaFollette

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.

Operator

Ladies and gentlemen, that concludes today’s conference. Thank you for your participation. You may now disconnect. Have a great day.

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