American Equity Investment Life Holding's (AEL) CEO John Matovina on Q4 2015 Results - Earnings Call Transcript

| About: American Equity (AEL)

American Equity Investment Life Holding Company (NYSE:AEL)

Q4 2015 Earnings Conference Call

February 11, 2016 10:00 AM ET

Executives

Julie LaFollette - Director, IR

John Matovina - President and CEO

Ted Johnson - CFO and Treasurer

Ron Grensteiner - President, American Equity Investment Life Insurance Company

Jeff Lorenzen - EVP and CIO

Analysts

Mark Hughes - SunTrust Robinson Humphrey

Steven Schwartz - Raymond James

Pablo Singzon - JPMorgan

Kenneth Lee - RBC Capital Markets

Randy Binner - FBR Capital Markets

Erik Bass - Citigroup

John Barnidge - Sandler O’Neill

Operator

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.

Julie LaFollette

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 Web site 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 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 Web site shortly after today’s call.

It is now my pleasure to introduce John Matovina.

John Matovina

Thank you, Julie, and good morning, everyone, and welcome to our. As we indicated in our press release fourth quarter financial results capped another record year for our operating income and the related per share amount. 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 invested 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 one half of 1% 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 the 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 roughly $24 per share. Also during last year's standard quarter’s recognized our greater strength and upgraded our holding company rating from below investment grade to investment grade.

Now when 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 rider in the fixed index annuity market based upon sales for 15 over 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 in at a 13% annual rate, while policyholder funds under management have grown 15% annually. We believe that tract record classifies America Equity is one of the best growth companies of the past decade in the life insurance industry.

Now looking at some specifics of the 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 invested assets continue to offset the benefits we're receiving from reducing our liability rates and policies.

Fourth quarter sales as we announced were 2.1 billion that is a record for any single quarter and were up 86% from the prior year and 17% sequentially. Our outstanding sales for the fourth quarter and full year benefitted from meaningful success we had with Eagle Life selling at 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 in mining sectors in their investment 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 of course by extension that higher investment leverage also means more exposure to the energy and metals mining sectors relative to our stockholders’ equity.

Now this isn't surprising that 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 would largely drive from our investment spread which is earned within the balance 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 portfolios.

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 maturing investments, our loss experience was better than the industry norm and I'm optimistic that when the current situation normalizes whenever that maybe the 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 cables in our -- under sectors in our financial supplement for your review.

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

Ted Johnson

Thank you, John. Our operating income of 50.1 million for the fourth quarter was 1% lower than the fourth quarter 2014 operating income of 50.7 million. We had a modest 1% increase in pretax operating income however the effective income tax rate, rate for the fourth quarter was higher than fourth quarter 2014 and slowing the after tax outcome to a small decrease. The related diluted per share amount of $0.60 for the fourth quarter was 5% lower than fourth quarter 2014 diluted per share amounted $0.63. The diluted share count for the quarter was 5% higher than fourth quarter of 2014 diluted share.

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 1 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 second 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 yield 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 effect from rate reductions were partially offset by 1 basis point decrease and the benefit from over-hedging the obligations for index linked interest from 2 basis points in the third quarter to 1 basis point in the fourth quarter.

We have been counteracting the impact of lower investment yields by reducing the rates on our policy liability. 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 in the 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 see that 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 A.M. 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 enabled us to better manage our capital on that 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 agreements, 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 sale 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 impairment, 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 watch list, we do not anticipate the recognition of any further OTTI for this issuer. The securities had a 3 million unrealized loss at December 31st as the impairment recognized was based upon the expected credit loss and not the fair value of the securities at December 31st.

Now, I will turn the call over to Jeff Lorenzen.

Jeff Lorenzen

Good morning. Throughout the year we maintain a very high quality low risk portfolio. The improved 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 an average credit quality from A minus 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 NAIC 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 floating 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 anyone issuer. Approximately 95% of the energy-related securities are investment grade based upon the NRSRO rating. Our lowest rated energy holding is rated double B. In addition metals and minings represent 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 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 on our stress test analysis we estimate that an additional 358 million of our energy and metals and mining exposure has the potential to migrate to non-investment grade through the credit cycle. We estimate that if all of these securities were downgraded to below investment grade. Our risk based capital ratio was declined by 6 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 unrealized loss of 53.5 million. Energy and mining securities represent approximately 67% of the total amortized cost. We added three issuers to our watch list 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 the value adding and managing credit risk in our portfolio. We monitor capital risk to reach 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 securities credit quality and term to 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, President of the Life Company.

Ron Grensteiner

Thank you Jeff, good morning everyone. Well it was indeed an incredible year, a record shattering year, I'm very proud of our American Equity team. Many companies have collapsed in service when they experienced 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 back 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 28th, 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 of 15 of the last 16 years. We were the benefactor of competitors pulling out of the market while reducing their sales target. 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 have 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'll certainly celebrate 2015 sales and always strive to grow, it maybe be difficult the 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 asked producers what good is higher income that the company financials can't support it, or if policyholders receive an inferior renewal rate or 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 benefits specials, this is not unusual as many companies try to grab some market share early in the year.

So in 2016, maintaining the basic principles that our Founder Dave Noble laid out for us 20 years ago will be very important. We don't need the highest benefit, interest rates or compensation. We need only to be 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 rollup 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 of 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 a great addition to our FIA portfolio. We are 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 indexing 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 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 2 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. Principal protection and the opportunity 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 would like to talk about our Gold Eagles for just a moment, our Gold Eagle agent is someone who produces at least 1 million of 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 that 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 4,931. One year ago today, pending was 3,085.

Finally, we are continuing our client appreciation events in 2016. These events are a wonderful opportunity for us to meet our policyholders, share 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 you for entrusting us with their retirement money. We don't 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 hosted a grand total of 107 events with 23,529 guests.

And with that, that concludes my report and I am going to turn it back to John.

John Matovina

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 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 principal 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're 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.

And so with that, we will open up the line of calls from the audience.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question is from Mark Hughes of SunTrust. Your line is open.

Mark Hughes

The pending count of 49.30 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 of still the growth potential here?

Ron Grensteiner

Well I think so, I looked 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 coming -- changing its provisions and if I threw out the fourth quarter our pending comp for the whole year last year averaged about 4,700. So, looking at where it as today and where it was for most of the year last year. I feel pretty good about that.

Mark Hughes

So, are you saying that 4,700 is a more appropriate measure isn’t there some seasonality that is going to influence them?

Ron Grensteiner

Yes in January historically if we don't have a big change to your policy form for year-end, January is usually pretty lite and then it kind of builds momentum up for tax season and we got 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 just kind of depends on the speed and it depends on product introductions and what the competition is doing.

Mark Hughes

So saying all that is this just not a relatively clean comparison, the 4,900 versus the 3,100?

John Matovina

This is John Mark I guess my guess is there's probably still maybe a little bit in the 4,900 from year-end but we're now almost 45 days away. And actually we have numbers in the file that say how many are 30 days old, 45 and all that but, I guess 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 buildup. And it doesn’t include Eagle Life either Mark, the numbers I talk about in pending, are only American Equity and we are seeing Eagle Life have some pretty good pending counts today Eagle Life's spending is over 300 which is the highest, it's been all year so far.

Mark Hughes

So, your cautionary language John around a lot of these factors increase competition of products, design, that's kind of a notional warning you are not -- have Series B in the marketplace as of yet if I'm reading these numbers correctly, is that right?

John Matovina

I suppose that's a reasonable assessment, I think we've been maybe a -- we thought it might pullback more than it really has, but I think on that but there's -- it's still early in the year as Ron said some of the competitors have some specials going on right now. I kind of suspect to 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 on that, so it's probably a little too early to draw any specific conclusions about what we might see for the balance of the year.

Mark Hughes

What's the current new money yield, what are you putting the money to work at now?

John Matovina

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

Mark Hughes

So, kind in line with last year [Multiple Speakers]?

John Matovina

Right.

Mark Hughes

These volumes for last year a big increase what is the spread that you're expecting on those sales, are they being priced at a 300 basis point spread, I think we've discussed this issue before or there is still kind of free riding a little bit off of the high [indiscernible] kind of thinking about which your pricing is on these very new sales?

John Matovina

You're breaking up a little bit there, but the…

Mark Hughes

I am probably mumbling top so I apologize.

John Matovina

I mean 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 -- are some of our portfolio rate is available to support to 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 four's to support new sales, with 115 credited rate, I think is where we are at our bonus gold product these days. And the bonus gold has 290 spread requirement, I think the other thing is the -- we did see -- I mean 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 at American Equity, and those spread on those products is only 210 as a requirement and those were -- that product was like high single-digits, if our sales last year and so that's reducing the -- 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.

Mark Hughes

You had previously made a projection about what you expect that Eagle Life would look like last year care to do it again for 2016?

John Matovina

I don't know that we made any projection. I think we said there if we got to 500 million then we'd 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 is going to be disappointing. I don't know that -- I won't throw out a number on the upper end, but [Multiple Speakers].

Mark Hughes

Could you talk about the portfolio, investment portfolio, I think you had said there was an additional 358 million at risk, was that just within the energy or sector does that include other mining any other potential focus sectors?

John Matovina

That included mining and energy.

Mark Hughes

And during the last cycle, during the last session, can you kind of refresh us on how the portfolio performed?

John Matovina

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.

Operator

Thank you. Our next question is from Steven Schwartz of Raymond James & Associates. Your line is open.

Steven Schwartz

I got a few as well, but I think first one, John can you talk around what was change in the IDR in December where do you go from two?

John Matovina

We reduced the role of interest rate by 1% for all of our benefits, so the 7% role went to 6, the 6.5 went to 5.5 and et cetera.

Steven Schwartz

And for Ted, given and I didn’t to know what to say about sales, but where would you -- what kind of sales numbers would indicate to you that headers no indeed to take down the forward?

Ted Johnson

Steven, I think we're going to have to see how that plays out during the year. First of all we actually fold more into 2015 than we what we felt our high-end production scenario would be, so I think when you're talking about a high production scenario for 2015, we talked about 6 billion, so we obviously exceeded that. So in some of those sales high end productions scenarios and we're talking about some of the sales have been frontloaded into 2015 and that total sales high-end production scenarios shows 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 you would need to take in whether it's 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 had just commented on, it's looking more likely than not that we would be pointing at 135 million and then based upon the pending count and what Ron has just stated.

Steven Schwartz

Going back to, Ron, could you, going back to the LBI, our -- in where you're competitively where are the product you're talking about, are they 100 basis points higher?

Ted Johnson

Well when we look at the LBI looked at it from an income compassion, how far away are we percentage wise from the Company that's offering the highest income and it kind of depends on the age of the annuitant, how long they wait to defer 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're probably somewhere between 5% and 8% within the number one company on our income. So we're pretty close, pretty good and pretty competitive that's on our male factor, our female factors are a little less competitive or further off those are about 10% off of the number company in most of the sales.

John Matovina

And just to clarify, there is kind of multiple things in the rider that you can't just sight the role operator as you started with your question Steven for instance we use compound interest, other companies use simple interest and then the other factor is the payout factor. So you really have to -- you can't 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 in these companies like rider, because there're not uniform in terms of what companies do, to come up with what the relative comparison is. If you look that the role operate by itself, we're right there with everybody else assuming they're doing compound interest like we are and then there's some companies that use simple interest and of course they can talk about higher interest rates, because it's simple interest.

Steven Schwartz

Yes, sure, no, I never heard about that. Okay, then Ron, where are you now situated with advisories sell.

Ron Grensteiner

Well there's still a very good relationship for us, that if I were to look at my numbers and so far year-to-date they're number one marketing company. I have no reason to believe that they're going to -- that our relationship is going to deteriorate. They were the companies that sponsors or if the lead company on security benefits income product and I imagine that we'll 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.

Steven Schwartz

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 that you're looking at?

John Matovina

No.

Operator

Thank you. Our next question is from Pablo Singzon of J.P. Morgan. Your line is open.

Pablo Singzon

Energy and commodity assets have obviously been under pressure and as a reflective of [indiscernible] so they can set back however do you have a view in how credit losses ability emerge in your overall portfolio whether in terms of your role models or rating agency models, I think most companies would assume a run rate of about 10 different losses or a capital risk, so wondering that do you think a higher level be appropriate in the current environment? That's the first question.

John Matovina

Well I think in our corporate model we use about 12 basis points as our default or risk number. So, I think we're in line with what the industry is. We'll run it with a under a stress testing our models we will run it a little bit higher but as we see our portfolio we don't -- I think you look at the industry as a whole, you look at the market as a whole and we believe we've weeded out this the weaker credits so we have what we consider the higher quality credits from those sectors and as a result we're not going to seeing near the level of defaults that are being talked about in the market.

Pablo Singzon

And can you just give us a sense of what manages stress test or are you going to ramp it, is it twice the normal level, three times and I guess you're confident what's emerging from those tests?

John Matovina

Well our stress test on our individual companies are based at 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're looking at testing the corporate model or risk based capital we're just using assumptions for example we've taken $1 billion of BBB assets and moved them to BB assets and that is RBC in the tune of 9 to 10 basis points. So, we're always testing, we're understanding the implications of the potential downgrades to RBC, but on the individual basis my team were going in and testing at the raw commodity level the impact that would have on cash flows and obligations to bond holders.

Pablo Singzon

And that's the basis for I think you'd mentioned a six bps decline, six or seven bps is that correct?

John Matovina

Yes, six to seven bps decline would be -- would indicate if we saw continuation of current levels on our mining and energy names over the next 12 or plus months, that we can see a drift from BBB to BB.

Pablo Singzon

And then just shifting gears here so, did you speak of any of you with that, could you please frame for us how you see RBC capital developing over the next year given a number of factors like statutory leads generation, potential credit migration I think you had spoken about it a bit, you're growing orbit for sales and the four installment in August, like so we, I think you ended the year 336, where do you see that number closer to year-end 2016?

John Matovina

You are new to our call Pablo and we don't make projections like that.

Pablo Singzon

Okay, thank you.

John Matovina

All right, I mean we're obviously as Ted commented we've got 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 in that and that 135 starts being stressed in which case we'd look at other options, but we don't put out particular forecasts of sales, earnings or RBC.

Pablo Singzon

And then just shifting to the deal from your side proposal so, I understand that 84-24 is not above the finance price and it's probably therefore harder to compare for, but I guess what is sense what is sense for confidence that you deal with depth or the temptation period, assuming rules are worse than what you guys are expecting without disrupting your operations significantly, could you just sort of give me a sense of I guess you're thinking right now because it's forthcoming?

John Matovina

And you're right, the concepts in 84-24 weren't 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 doesn't fit with all the activities in the marketplace. But I guess my view was and I don’t know if we have 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 the proposal talk about an 8-month timeframe between finalizations rules and effeteness that to me was more than enough time to figure out what changes might be necessary based upon the final rule and I guess also in there might -- there would be more disclosers or perhaps more disclosers and the agent would have make the policyholders and we would be helpful in assisting them in doing that, but that wasn't the kind of things that we going to be any kind of monumental project either.

Pablo Singzon

Right, and in your assessment given your lean operating structure I guess from where you are at this point do you think you'll be able to manage like additional discloser requirements additional tracking?

John Matovina

Well, 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 as I said wanting to make sure that there our agents who are 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 set.

Pablo Singzon

Got it, okay. And then this would be the last part of the question it is one of those shift to sales and distribution, so maybe for Ron too, I just want to get more color on the distribution relations such as Eagle Life, Eagle Life that most of sales are coming from new major lines about 80% and you had mentioned a couple of days that you bought on Board maybe if you could just provide a background in terms of the size of the distributors you have versus those you added, what sort of penetration numbers you're looking at, just so that we get a sense of obviously Eagle Life sales grow at paces that you're talking from a low basis but just additional color on that would be helpful?

John Matovina

Well, the relationships that we have at Eagle, one of those relationships is one that we've had for a long-long time and has really embraced our FIA portfolio, our FIA portfolio at Eagle Life is, isn't more than a couple of years old and so they've embraced that portfolio when and where the benefit factor of that. Actually the one is a financial institution that is relatively new for us that was really a representative case when you can get into a financial institution and get a quality product out there it can really escalate that the sales can escalate rather quickly in those financial institutions and that is a case with the second group that's helping us at Eagle Life.

But that said, we are in the process of working some additional relationships most of them are the financial institutions variety versus the broker-dealer variety and we think we have a pretty competitive production that there life with competitive participation rates. So we're optimistic that we're going to get some traction in that channel and that's 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 you 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 it possible is just booze on the ground, is getting people out there and getting the training done and developing those relationships, I think is going to bloom well for us in 2016.

Pablo Singzon

And then my last question is just the -- in the release there was commentary about I guess an increased market competition the security benefit returned of the market seems like there are new players, I was just wondering and you guys have provided some discussion of the kind of products you're selling versus else, but in terms of distribution like are these new competitors mostly focused on dependent agents or are they are being aggressive in non-agency channels as well?

John Matovina

Are you referring to American Equity or Eagle Life?

Pablo Singzon

I'm talking about the competitors, right so, I think Security Benefit is one of them and there is a reference of a new entrant I guess in the quarter. I was just wondering if these companies are expanding share independent agents, I assume that most of them are but to the extent that there are companies trying to gain share in banks that broker dealers as well, I'll be interested if we hear about that?

John Matovina

Yes, 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're gaining more traction in the bank and broker dealer channel but there are companies that are kind of like us that are on both channels, but some are more prominent one than the other.

Operator

Thank you. Our next question is from Kenneth Lee of Royal Bank of Canada. Your line is open.

Kenneth Lee

Just want to quickly follow-up on Pablo's question if I can just in terms of the RBC ratio sensitivity, you mentioned there's like a six or seven percentage point sensitivity for energy grade security. Is that sort of linear in that there's like one or two notches we should just extrapolate that way?

John Matovina

Not sure I follow your question Ken?

Ron Grensteiner

Not completely, it's not linear I think in that analysis when the investment department did that, there are things that have going from the two -- any 3Q to a three or three to a four. So, I think the other sensitivity that he gave you so I wouldn't use that as linear, now the other sensitivity that Jeff talked about is just at a really high level, theoretically if you had billion dollars of corporate securities that move from a two to a three. The effect on RBC because of the increased RBC charges or capital charges would be approximately 10 or 11 basis points.

Kenneth Lee

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

Ron Grensteiner

Well they are all factors, there's multiple factors that you look at, you look at the length of time and in extent that the securities fair value has been below cost, you look at whether the issues was current on all payments and contractual interest that is due to you -- and one of the main things for all insurance companies is your intent. Do you have an intent to sale or do you have an intent to hold and tell that securities are covered, as most insurance companies like us, we have an intent to hold these securities to maturity so that's 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 reasons that are causing that but any one of those rating agency factor or change or decrease and the fair value of the security below cost those individually don't get companies to arrive that there's an impairment, you really got to go through the whole process and look at -- are you expecting to recover all of your money or not.

Kenneth Lee

And just one final question, I'm just curious about the holding of the [indiscernible] average short term assets in the fourth quarter and cash as well, was it just a timing issue and if then what was the main driver of that?

Ron Grensteiner

It is a timing issue it gets to you the flow of funds that are coming in and the availability to securities that meet the risk parameters and credit quality that we're looking at and the yield targets that we're 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're willing to temporarily hold and accept cash in short-term investments for short periods of time to allow us to be able to invest those funds long-term appropriately.

Operator

Thank you. Our next question is from Randy Binner of [FRB] Capital Markets. Your line is open.

Randy Binner

I have 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 and 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 got in year-to-date roughly?

Jeff Lorenzen

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

Randy Binner

And then Ted through a scenario where you had some below investment grade to risk and the energy portfolio and I think you sized that at 305 million, and I don't believe that's a number that's in the sub so just want to confirm that I got that right that you all did analysis of 350 million of that 3 billion portfolio I assume those would be BBB's that go to below investment grade, if I got that right -- what sub category are those mostly and what characteristic do those funds have at risk of being downgraded?

Ron Grensteiner

At 305 isn't the right number, I think on the sensitivity test that just area and the financial area of brand was looking at the energy and mining and metals factor and I think there was about $447 million of securities they identified for potential ratings drift and then that the effect of those drifting and rating was the fixed, the fixed drift that Jeff quoted before on the effective RBC. Now on the details of those securities let Jeff respond to that.

Jeff Lorenzen

They come up in different sectors and we rate them, we have what we put in that 447 million our securities that we believe have a higher probability and then those are on the sense that we don't know, so we think we're thinking a conservative deal when we're looking at making those assignments and we're also using the assumption that oil stays between 30 and 35 for the next months and that commodity prices for iron, zinc, copper all remain basically flat for the next two years. So I don't think we're getting unrealistically you start looking at forecast for commodity prices, we're already seeing gold, zinc some of the industrial metals up 8% to 10% so far this year. Clearly that's a tailwind for our analysis, oil on other hand has drifted lower, but I do think when you look at market forecasts a lot of the key market forecasters shown oil well above the 30 to 35 by the time we get to year-end as that supply demand imbalance starts to ease. So overall, I think I think we're being conservative on those numbers. We're gone through and look at them very closely. And as I look at our portfolio, the high risk areas that people know are the oil services and those of companies that we know are Schlumberger and Halliburton and Baker Hughes and National Oilwell.

Those are the companies that are not that's fairly one that are at high risk. The ones that at high risks are the smaller organization, the smaller amount of pops that really can't operate at a high at a low oil cost structure where these companies have been through multiple cycles are solid companies and those are at high risk factors. You look at our low risk factors such as our mid streams. Our natural gas pipeline companies with that are interstate pipelines they have 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 800 to 700 million of our exposure, our refiners, those are all doing quite well because refinery volume is up. So they are two big sectors of our portfolio really are not even in consideration. And if you're looking at like our integrated which are highest quality of our portfolio the Royal Dutch, BP, Exxon, Chevron, Mobil. These are names that are going to be around regardless of what the cycle is. They can weather, the downturn so when we're looking at the portfolio, we've come down to an isolated companies that we think are higher risk which is our -- we have a couple of small drillers they can dive in Weatherford that potentially could be downgraded. Those are ones that we're looking either two companies also there very strong and well respected in the drilling circle. So I think we've been conservative as we looked at our portfolio. We stayed on high quality names. We stayed on names that are less acceptable to day to today movements in oil prices and I think we're going to be positioned just fine as we go through this.

Randy Binner

I just wanted to clean up a question because I missed it in all the conversations, but you all gave a pending count that was 49.30 as of the end of quarter, I think as end of quarter was 7,000 so that was like today or when was that number for?

Jeff Lorenzen

Yes the number I quoted of 49.30 was today.

Randy Binner

And then the only number you gave out was the 7,000?

Jeff Lorenzen

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

Operator

Thank you. Our next question is from Erik Bass of Citigroup. Your line is open.

Erik Bass

Just want to get a sense on in your RBC targets and I think you've talked about wanting to be at 325 as a minimum, but what sort of flexibility do you have to go below that level from kind of the rating agents?

John Matovina

325 is a necessarily minimum, 325 was the trigger for us to be considering what we were doing or what we should be doing in regard to a capital raise or increasing our capital ratio. With A. M. Best they've always stated their threshold for A minus ratings with 300, RBC, S&P that is a little bit more of fluid number there is not really a hard and fast RBC number associated with that.

Erik Bass

And then you've alluded to some other potential sources of capital that you could use if sales volumes remain strong, you needed to tap it, I am assuming would that be things like co-insurance increasing the use or what else that somebody other kind of tools you have in the toolkit there?

John Matovina

So our other tools outside of if sales when accelerate and stress the 135 million that we have -- million that we have available under the two forward sales agreement. In addition to that we do have a debt capacity, our debt ratio on an adjusted debt level, adjusted debt to equity cap is below the 20% for a whole that we have targeted but 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 could draw upon and then there's also always reinsurance out there, there are 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've utilized reinsurance effectively to manage our capital.

Erik Bass

And on the reinsurance is it something where you have agreements sort of outstanding that you could tap readily or would it need to be new agreements put in place?

John Matovina

It would be a new agreement.

Operator

Thank you. [Operator Instructions] Our next question is from John Barnidge of Sandler O'Neill. Your line is open.

John Barnidge

Just a question on sales, how much of an increase in sales is coming from people, coming to dues on fixed index annuities and you might have competitive environment?

John Matovina

Look we all have exit surveys when they just buy the policies John, I don't think we can honestly answer that.

John Barnidge

And it sounds like your leaning towards settling that forward sale agreement and given increased competitions along with where your share price is fairly trading and then coinsurance and debt issuance you have available, have you any thoughts on repurchasing shares?

John Matovina

Probably -- no, we have given thought to it but we have advanced no plans that would say do something. The capital that's available there is, is there to support growth, so I suppose half way through the year as we're making a valuation of the 135 million per half and if it's not needed for sales perhaps the consideration of the share repurchase would might enter our mind but I don't think we want to use up any of our capital capacity at this point in time or at time of share repurchase but even though obviously that we could see we would be -- the price is attractive.

John Barnidge

And then the increased competition that you're starting to see, are you seeing any from any riders that historically maybe doing VA that are shifting over to the fixed markets is just because of the pending DOL rule?

John Matovina

That's the possibility when we look at for example linking -- in the FIA business of course already answers has always been in our business but they also are in the VA side too. American general I think is the VA side, but we haven't seen any significant players other than once that I've mentioned started to migrate into our business, I guess nationwide was one that was that made a big splash in our market last year.

John Barnidge

My last question, about a week ago, there was HR 4293 and 4294 the pass the house panel that will replace the DOL rule before these goes into effect. Do you have any thoughts on that potential success or what the industry might do if the OMB doesn't prove the final ruling?

John Matovina

Well we don't project annuity sales but now that we certainly don’t want to handicap the political process. So, I guess I see that 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's an interesting political exercise. But I guess I just -- I don’t see anything at the moment that says it's got any legs to it.

Operator

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.

Julie 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

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.

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