American Equity Investment Life Holding's (AEL) CEO John Matovina On Q4 2016 Results - Earnings Call Transcript

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American Equity Investment Life Holding Company (NYSE:AEL) Q4 2016 Earnings Conference Call February 9, 2017 9:00 AM ET

Executives

Julie LaFollette - Director of Investor Relations

John Matovina - Chief Executive Officer

Ted Johnson - Chief Financial Officer

Ron Grensteiner - President of the American Equity Investment Life Insurance Company

Analysts

John Nadel - Credit Suisse

Western Bloomer - FBR Capital Markets

Pablo Singzon - JPMorgan

Erik Bass - Autonomous Research

Mark Hughes - SunTrust

Dan Bergman - Citi

John Barnidge - Sandler O’Neill

Alex Scott - Evercore ISI

Presentation

Operator

Welcome to American Equity Investment Life Holding Company’s Fourth Quarter 2016 Conference Call. At this time, for opening remarks and introductions, I would now like to introduce 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 2016 earnings. Our earnings release and financial supplement can be found on our website at www.american-equity.com. Non-GAAP financial measures discussed on today’s call and reconciliations of non-GAAP financial measures to the most comparable GAAP measures can be found in those documents.

Presenting on today’s call are John Matovina, Chief Executive Officer; Ted Johnson, Chief Financial Officer; and Ron Grensteiner, President of the American Equity Investment Life Insurance 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 number of risk 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 Matovina

Thank you, Julie. Good morning everyone and thank you for joining us this morning. We finished 2016 on a strong note reporting non-GAAP operating earnings of $0.63 a share that was appreciably above the third quarter amount when you exclude the effects of the revisions to the assumptions and unlocking - a reminder that, excluding those items we had $0.55 a share in the third quarter, and it was also then slightly more than the $0.60 per share we reported in the fourth quarter of 2015.

As you will hear from Ted shortly, we had a couple of positive developments in the quarter that should be trendable for future quarters and we have one positive item that is discreet to the quarter. Our performance in 2016 in the three key areas that drive our earnings and financial performance was mixed.

As a reminder, the key measurements are to grow invested assets and policyholder funds under management, generate a high level of operating earnings on the growing asset base through the investment spread and then minimizing impairment losses in our portfolio. So for the year, on the first measure we delivered 9.6% growth in policyholder fund under management, we generated 6.7% non-GAAP operating return on equity, and our investment in impairment losses after the effects of DAC and income taxes were about 0.5% of average equity.

The growth in our policyholder funds under management was fuelled by our record $7.1 billion in gross sales that was up slightly from the record sales we had last year or in 2015. However we had much larger contributions to sales in 2016 from products that were coinsured and our net sales effort for coinsurance declined 18% to $5.4 billion.

However that still represents the second highest year for net sales in the company's history. Our formula for growth in funds under management has been to develop and maintain excellent relationships with our distribution partners and have a consistent presence in the fixed index annuity marketplace and that formula has allowed American Equity to rank in the top three of fixed index annuity sales in 16 out of the last 17 years.

Our non-GAAP operating return on average equity was negatively impacted by the unlocking and assumption revisions we had in the first and third quarters of last year. Excluding those items, our non-GAAP operating return on average equity would have been 10.8%. That result is still a bit below our historical performance then is attributable to the narrowing of investment spreads that we’ve been talking about for quite a few quarters now.

Our low level of impairment losses reflects our commitment to a high quality investment portfolio. That measure has been 0.8% or less in each of the last four years. Looking back over the year, it is safe to say that 2016 had its share of challenges. In my mind, the biggest challenge was dealing with the low interest rate environment that we’ve been in since well before the beginning of the year, and certainly well investment yields have reversed the download path they follow for much of 2016.

The fact is that rates today are only slightly higher than they were at the end of 2015. And of course another major challenge has been the Department of Labor's fiduciary rule, which poses significant challenges to sales of fixed index annuities by independent agents and will limit access to a fixed annuity insurance product that more and more Americans find to be the right solution for their retirement savings and retirement income needs.

While we were hopeful that legal challenges to the rule would overturn or delay litigation, including yesterday’s decision in the northern district of Texas has been unsuccessful. Another update last month that DOL proposed for comment, a best interest contract exemption for insurance intermediaries, kind of often referred to as the IMO Exemption, that could facilitate sales of fixed index annuities subject to the fiduciary rule by independent insurance agents.

However, in our view the proposed requirements may arbitrarily and unnecessarily prevent some highly qualified independent or national marketing organizations from obtaining financial institution status and even if the proposed exemption is finalized prior to April of this year, the eligible marketing organizations may not have sufficient time to meet the proposed requirement.

Also since last November's presidential election there has been much speculation about a possible delay in repeal or placement of the fiduciary rule. Last week's presidential memorandum increases the likelihood that a delay of the April 10 applicability date may be forthcoming. However, no action has been taken by the department this time and proponents of the rule have been very vocal in their positions who would delay.

We would certainly welcome a delay in the opportunity to work with relevant parties to draft a rule that meets the DOLs objectives, but allows for continued access to fixed index annuities by Americans saving for or enjoying their retirement. I will be back at the end of the call with some closing remarks, but now I’d like to turn the call over to Ted Johnson for additional comments on fourth quarter financial results.

Ted Johnson

Thank you, John. As we reported yesterday afternoon, we had non-GAAP operating income of $56 million or $0.63 per share for the fourth quarter of 2016, compared to non-GAAP operating income of $50.1 million or $0.60 per share in the fourth quarter of 2015.

Our diluted share count was 6.4% higher in the fourth quarter of 2016, compared to the fourth quarter or year ago, primarily due to the settlement of two equity forward sales agreements through the issuance of 5.6 million shares of our common stock in the third quarter of 2016.

We have one discrete item in the quarter; a $2.3 million reduction of an accrual for potential guarantee fund assessments. This reduction benefited operating expenses and on an after tax basis benefited both net income and non-GAAP operating income by approximately $1.5 million, or $0.02 per share.

Investment spread for the fourth quarter was 262 basis points compared to 257 basis points in the third quarter, as a result of for 1 basis point increase in average yield on invested assets, and a 4 basis point decrease in the cost of money. Average yield on invested assets was 4.47% in the fourth quarter. The average yield continues to be unfavorably impacted by the investment of new premiums and portfolio cash flows at rates below the portfolio rate.

The unfavorable impact from this factor was partially offset by fee income from bond transactions and prepayment income, which added 7 basis points to fourth quarter average yield on invested assets above the third quarter level of 4 basis points. The unfavorable impact from investing at rates below the portfolio rate was partially offset by a reduction of the impact on investment income and yield from carrying high cash and short-term investment balances.

The average balance for cash and short-term investments declined to $307 million in the fourth quarter, compared to $1.2 billion in the third quarter of 2016. And we ended the fourth quarter with excess cash and short-term investments of just $29 million. The benefit from a fully invested profile should carry forward into 2017. The average yield on fixed income securities purchased and commercial mortgage loans funded in the fourth quarter was 3.71%, compared to 3.31%, 3.95%, and 4.14% in the third, second, and first quarters of 2016 respectively.

In January, we invested new money at nearly 4.1%. The aggregate cost of money for annuity liabilities was 185 basis points in the fourth quarter, compared to 189 basis points in the third quarter. This decrease reflects continuing reductions in crediting rates on enforced policies and a lower cost of money on new deposits. The benefit from over hedging the obligations for index linked interest was two basis points for both the fourth and third quarters.

We have been working to counteract the impact of lower investment yield by reducing the rates on our policyholder liabilities, but the impact on the cost of money from these reductions is less than the impact on average yield on invested assets from investment purchases by a few basis points. We will continue to achieve reductions in our cost of money through renewal rate reductions that will be implemented on policy anniversary days over the remainder of this year.

We continue to have flexibility to reduce our crediting rates, if necessary and could decrease our cost of money by approximately 49 basis points if we reduce current rates to guaranteed minimums. Other operating costs and expenses in the fourth quarter were $23.4 million, which reflects the previously mentioned benefit of $2.3 million from the reduction in an accrual for potential guarantee fund assessments.

In addition, other operating costs and expenses were reduced by $1.1 million for a lower reinsurance risk charge under our reinsurance agreement with an unaffiliated reinsurer. Under this agreement, we cede excess regulatory reserves to the reinsurer and payer risk charge for the regulatory reserve credit received. The agreement was amended effective October 1 and the lower risk charge will continue over the remaining term of the amended agreement.

Our risk based capital ratio at year-end is 342%, up from 336% at the end of last year. We funded the increase in required capital from another robust year of sales with $235 million of proceeds from previously discussed equity and debt capital raising activities and 105 million of internally generated capital.

Now, I’ll turn the call over to Ron to discuss sales, marketing and competition.

Ron Grensteiner

Thank you, Ted. Good morning everybody. As we reported yesterday, full sales for 2016 were a record $7.1 billion, slightly surpassing our previous record set back in 2015. We achieved our new record on the strength of almost $1 billion or 290% increase in sales by Eagle Life, which offset $900 million decline in sales at American Equity Life.

A large portion of the increase for Eagle Life was from multi-year rate guaranteed annuity policies or MYGA policies. American Equity Life also saw sales of MYGA policies increase by $370 million. In 2016, we coinsured 80% of Eagle Life sales and 80% of American Equity Life's MYGA sales resulting in an 18% decrease in net sales to $5.4 billion.

Looking at the fourth quarter, total sales were $1.4 billion before coinsurance ceded and $1.1 billion net of coinsurance ceded. These amounts were substantially less than the record quarter sales posted in the fourth quarter of 2015, which benefited significantly from the absence of products from a major competitor. On a sequential basis, growth gross sales were down 10% with net sales flat.

American Equity Life's gross sales for the quarter of $1.2 billion declined 1% sequentially, while Eagle Life's gross sales of $210 million declined 40% sequentially, but were up slightly from the fourth quarter of 2015. Our observations indicate that industry sales of fixed index annuities in the fourth quarter may be down on both a sequential and year-over-year basis, low interest rates, and a more robust stock market may be factors.

We also believe actions by distributors to conform to the DOL fiduciary rule where a distraction from marketing efforts and played a role in lower sales. Finally, we have seen evidence that are registered representatives are repositioning money away from annuities and into managed money and anticipation of the DOL fiduciary rule. The sales environment in the first quarter has been very aggressive, perhaps more than usual as insurers look to get a strong start for the year.

We have seen companies improve lifetime income benefit rider terms by increasing roll-up rates, income benefit bonuses and payout factors. Some companies have also been quick to raise interest cap and participation rates following the jump in the 10-year treasury rate, many competitors have increased new money rates twice since the presidential election.

In January, we announced modest increases on Eagle Life's FIA products and the comparable American Equity Life, FIA products. However, as John mentioned in his opening comments, rates today are only slightly higher than they were in the beginning of 2016. Our philosophy has always been that we will not chase sales at the expense of spread, our commitment since day one has been to have competitive rates and commissions not necessarily to be the highest.

Dave Noble instilled in us that our difference makers would be excellent relationships with our distribution partners and the best service in the business. Competitive products, plus excellent service equals success, our formula for 20 years now. A testament to our philosophy is the fact that nearly 50% of American Equity's 2016 premium was through 623 elite Gold Eagle members, our most committed relationships.

Elite members produced at least 2 million of premium in a calendar year. All of our Gold Eagle members, those who write at least $1 million in premium were responsible for 62% of our sales. This group was made up of 1,220 individual producers. Focusing on Eagle Life for a moment, in 2016 we added one wholesale in relationship and 11 selling agreements for a total of 53.

We also have seven anchor accounts; those that produce at least $30 million annually. And in 2015, we had to anchor accounts produced over $100 million in premium, but we finished 2016 with four anchor accounts are producing over $100 million in premium. That said, the competitive landscape is even more furious and the bank had broker dealer channels, some companies have rates that we consider untouchable.

While our excellent customer service reputation is very important that Eagle Life, the bank and broker dealer channels seem a bit more rate sensitive compared to the independent agent channel. Both companies are making progress in the bank and broker dealer channels, on a combined basis 5% of our 2015 FIA sales came from banks and broker dealers; and in 2016 that percentage increased to 11%.

We understand that 2017 is off to a slow start industry-wide and at American Equity and Eagle Life. One of our NMO’s indicated that January was their lowest month of sales in the past 24 months. Pending applications are at the lowest we have seen since early 2014. As of today, American equity's pending count is 2,515. It was in the low-to-mid 3000s for the fourth quarter. Pending at Eagle Life is at 118 today. During the fourth quarter it was in the mid-200s to low 300's.

Looking forward, we’re planning on some product enhancements that we think will help us gain some momentum this year. In early March, we will be introducing several traditional fixed rate annuities with a competitive lifetime income benefit rider. These products were designed primarily for independent insurance agents looking to sell under prohibited transaction exemption 84-24 of the DOL fiduciary rule.

Due to the competitive guaranteed income, we think they will be accepted by broader group of agents. We’re also looking to having a new version of our lifetime income benefit rider available for our FIA products in the second quarter. Finally, we are planning to all for several of our FIAs with an optional market value adjustment or MVA feature, policyholders selecting the optional MVA feature would receive higher rates than policyholders not selecting the MVA.

We have resisted having MVAs in the past on our FIAs, but have found ourselves to be outliers by not having them. We haven't discussed our client appreciation events for some time and I’m happy to report that we will be continuing them in 2017. We have been conducting these special lunch-ins for our policyholders and their agents around the country since 2010.

Today, we have had 127 events with 26,436 policyholders and 1,629 agents in attendance. This is a wonderful way for us to solidify our policyholder’s confidence and our company in producers. The benefit of this program are very apparent to us based on the feedback from our agents and the countless comments, cards, and emails we have received from policyholders every time we hold an event.

We recently had any event in Scottsdale, Arizona and I received this note after the fact. To whom it may concern, my husband and I just recently attended the American Equity Client Appreciation Event in Scottsdale, Arizona, this was our first appreciation event lunch-in. We wanted to thank you for recognizing your clients. The event was well-organized and information. We don't know of another insurance company who recognizes and celebrates their clients. We thank you again. We are glad that we are your clients and yes, we do sleep well at night because of our decision to trust our money in your hands.

And with that, I’ll turn the call back over to John for concluding remarks.

John Matovina

Thank you Ted and Ron. It goes without saying that 2016 had its share of challenges and several of those challenges are still with us. However, looking to the future, we feel good about 2017. We are optimistic that the interest rates will continue to move higher based upon expectations for a more robust economy, which is predicated upon lower tax rates, infrastructure spending, and a more business friendly regulatory environment.

And as I said earlier, we would welcome a delay in the DOL fiduciary rule and are optimistic that the new administration will recognize the harm, the fiduciary rule will cause for America's retirees and delayed rule. However, if a delay does not occur by April 10, we are ready with product and operational strategies that we expect will partially mitigate the potential disruptions in fixed index annuity sales by independent insurance agents.

Thinking longer term beyond those immediate challenges, the wins remain in our favor as we've said for many years. The need for guaranteed lifetime income will only grow and our products, fixed index annuities with lifetime income riders remain the most efficient way to provide these guarantees. American Equity's strategy is set by our founder Dave Noble is unchanged.

We want to continue to offer attractive products with principle protection and guaranteed lifetime income that meet the needs of Americans preparing for or enjoying retirement. We want to build and maintain strong relationships with our distribution partners, we want to stay consistent in our business practices, and maintain a consistent presence in the marketplace, and we want to provide the industry's best service to our distribution partners and policyholders.

These tenants together with maintaining an investment portfolio that is high in credit quality have been the key to our success in the past and will continue to guide us in the future. American equity has created a strong foundation for more success in the years ahead. That foundation is the result of the extraordinary commitment that each of our employees brings to our office each day, and so on behalf for American Equity management team and our 530 employees, thank you for your time and attention this morning and interest in our company.

We’ll now turn the call back over to the operator and open it up for questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question is from the line of John Nadel of Credit Suisse. Your line is open.

John Nadel

Thank you, good morning everybody. I guess the first question is, it sounds to me from your commentary like the competitive environment and maybe this isn’t specific or only limited to the bank and broker dealer channel, but it definitely sounded like you were highlighting that, has really elevated here of late, I mean can you give us some way of measuring how much differential there is between the overall crediting rate that you’re willing to offer currently versus what’s being offered by some of the competitors who are maybe taking share currently?

Ron Grensteiner

Yes, good morning John, this is Ron.

John Nadel

Good morning Ron.

Ron Grensteiner

When we look at our rates at Eagle and at American Equity for that matter, and we look at non-bonus products, our competitors are 90 to 100 basis points and in some cases higher than we are. And…

John Matovina

Those are caps.

Ron Grensteiner

Yes. Thank you, John. In caps. Participation rates obviously it’s not quite that much, might be difference between 40% and 45% in participation rate. So, the thing that why it’s particularly sensitive at Eagle Life is when we get on the shelf at a bank or a broker dealer, the bank and broker dealers already done all the vetted so to speak for all the companies that they agree to have selling agreements with.

So at the rep level, they look at all the companies out there and they will gravitate towards companies that have good service and good relationships with, but all of the companies have been vetted by the financial institution. So rates, the bigger the disparity they’re going to go to the company that has the highest rates, and when there is that big of a disparity today, you know it’s not in the cards for us to raise rates, our caps from 90to 100 basis points.

John Nadel

Yes, I appreciate that. And then maybe a question for you John, one other company that I cover that may be most of us on the line cover, Lincoln Financial has done a pretty good job these last couple of years in light of, definitely a company that’s more focused on the variable annuity market, but has done a pretty good job of indicating to investors that pressure on - downward pressure on variable annuity sales that management would take the capital that was otherwise earmarked for sales growth, in returning that to shareholders via incremental buybacks such that the impact on earnings per share over time would be effectively nil. You know, to the extent that you continue to see that kind of pressure on indexed annuity sales in particular looking out, is that something that the management and board at American Equity might be considering?

John Matovina

Well certainly if we found ourselves and we’ve said this in response to questions and meetings and I don't know how far back we’d have to go on earnings call or more public scenarios, but certainly capital, sales decline or back off and capital starts building that certainly tells us to evaluate what’s the best use of that capital. I know probably a fair amount of conversation along those lines as we were ending 2014 and entering 2015, our risk-based capital ratio had elevated up to 372%, and so we were starting to think about what’s the level where really is excess and probably 350 was in our minds back then, but we are also coming up of a period where we had vetted sales of about 4 billion for two years in a row, a little more than 4 billion.

In the back of our minds thought that’s not the right number for sales, it could easily be higher and low and behold before we had to make that decision, one of the major competitors pulled their products out of the marketplace and our sales took off. So, we never got to the final decision on that, but certainly if we find ourselves in a low sales environment and the prospects for continuing that low sales environment are high capital will build and we will be considering what’s the right use for it.

John Nadel

Alright, I appreciate that. Thank you very much John.

Operator

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

Western Bloomer

Hi good morning. This is Western Bloomer on for Randy. Do you guys have a run rate of quarterly expenses associated with the DOL and has there been any change to that, I guess since the election, kind of be interested to hear are there - like the cost to unwind any DOL expenses you’ve implemented or would expenses run lower? Thanks.

John Matovina

We don't really have a run rate for DOL expenses. Now we did note, we thought DOL expenses decreased this quarter by approximately $0.5 million, but there isn’t a regular run rate for those. Those expenses have been somewhat lumpy over time as we’ve hired outside consultants to help us and as we've implemented things. I don't really foresee any additional costs to unwind anything. Again, we’re still in a period of time where we don't know exactly, even if the rule does get delayed there are still ultimately a question of what could happen in the future, so there very well could be future costs associated with DOL.

Western Bloomer

Okay. And then just as a follow-up, is there any way to quantify the sales impact from DOL versus competition, is it more 50-50 or too difficult to quantify at this point?

John Matovina

We never would get that level of insight Western. I think for 13 years now the sales information we have is often pretty anecdotal, you hear conversations we pick up through interactions with our marketing partners in that, but never so precise that you can say it is this percent that percent from the different sources.

Western Bloomer

Okay thanks. That color is helpful. Appreciate it.

Operator

Thank you. Our next question is from Pablo Singzon of JPMorgan. Your line is open

Pablo Singzon

Thank you. So, as you guys pointed out, it seems like the likelihood of DOL rule will be postponed as higher on the back of executive order from the White House, so my question is can you please comment on your understanding of the mechanics and timeline of how the rule could be postpone, just given the requirements of APA between now and April?

John Matovina

It has been several weeks since I read the details on that Pablo. My recollection was that an Acting Secretary could, without much difficulty specify a short-term delay, and that a longer term delay would require more procedural action out of the Department, perhaps some comments or exposure to comment in that because - you’ve got it right, you’ve got a rule that’s been promulgated pursuant to the APA.

Pablo Singzon

Okay. And then my second question is, somewhat related to that, so some of your peers have said that they are willing to service and I'm talking about insurance companies, the service financial institutions for IMOs under the BIC, so just assuming that the DOL rule is not postponed by April 2017, do you think this puts your competitive disadvantage given your position not to service as an FIA?

Ron Grensteiner

This is Ron, when we look at our IMOs or NMOs at American Equity there - we determine that a very large percentage of them will have a path to be a financial institution either because they own a broker dealer or they own a registered investment advisor or they’ve filed for financial institution status with the DOLs. So, I’m not - I think based on no statistics, we are comfortable that there is a path for our producers to have their business fall under BIC.

Pablo Singzon

Okay, thank you.

John Matovina

Pablo, this is John, one other point on that, I mean it’s been a while since there has been any active conversations around here that I know of about which carriers may or may not be serving or be willing to service financial institutions. But I am just not aware that any of them kind of unequivocally said they would do it. So I am not sure, and I guess I would still think that’s the case that…

Pablo Singzon

Okay, thank you.

Operator

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

Erik Bass

Hi thank you. Given the spread pressure that the industries faced, are you surprised that pricing has moved this quickly in response to rates and just does it change your view at all on the potential to get back to historical target spreads, even if the interest rate environment continues to improve?

John Matovina

Well certainly pricing is surprising to us. We know other companies might be willing to accept lower levels of credit quality or other approaches to generating some high higher investment deals, but that in our view Erik, doesn't support some of the differentials in rates that we see. I just have a hard time believing this as a long-term situation that, I just don't see how they can persist that those rates for an extended period of time.

So, I don't know if some companies are trying to have a very good first quarter not knowing what the balance of the year is going to look like because of the DOL uncertainty or what the motivation is for some of those higher rates. Historically, companies with one exception have not really stayed outside of the norms of general competition for an extended period of time, but I suppose there is always a possibility that traditions breakdown and something else happens.

Ron Grensteiner

I’ll add to that a little bit John and that some of our intelligence in the bank and broker dealer channel in attending the various meeting, the banks in particular are telling companies that they are going to determine who stays on their shelf after a sales analysis. And so our impression is that there is probably some companies out there that who are trying to stay on the radar by having elevated rates.

So they make sure that they have some sales and stay on the shelf. And when we talk to whether it’s the independent channel or the bank channel, everybody tells us that sales are down, yet those same financial institutions and agents are [indiscernible] for those companies that have these really elevated rates. So, where is the theory there, I’m not sure.

Erik Bass

Got it. Thank you. Appreciate the color. And then just one follow-up on your new product development, in addition to the new fixed annuity products you talked about, are you looking at any fee-based fixed index annuities that could work in managed accounts?

Ron Grensteiner

Yes, we are. It’s relatively easy thing for us to do. We have a couple of products on the shelf that is just a matter of stripping of the commissions and leaving the surrender charges and the other features intact and then increasing caps and participation rates on those products and put them out there. So, there is no filing that we feel we have to do, it’s just something that we haven't done yet, and waiting to see if there is a demand for it.

Erik Bass

Okay. Thank you.

Operator

Thank you. Our next question is from Mark Hughes of SunTrust. Your line is open.

Mark Hughes

Thank you, good morning. On the crediting rates you have been getting about 4 basis points this most recent quarter. With the competition out there, with the change in interest rates is there, should we assume that you will continue to follow through with the adjustment on crediting rates or might you back off on that to stay competitive?

John Matovina

Are you, Mark this is John, are you referring to the renewal rate adjustments?

Mark Hughes

Yes, yes.

John Matovina

Those renewal rate adjustments are on pass so to speak and in they will not be rescinded or adjusted. I think we've said on several other occasions in response to questions about those that the competitive factors don't extend down into renewal rate activity, and while that may sometimes show up in conversations with agents as they see how different carriers treat their policyholders on renewal and I think even with our adjustments, we've treated ours awfully well relative to what we hear about how they may have been treated by some other carriers, but that’s not really a big question in the competitive landscape, unlike comparisons of rates for new sales opportunities.

Mark Hughes

Understood. And then could you maybe adjust your coinsurance strategy or reinsurance strategy strategies if you’ve got extra capital, would you keep more of that or that business in house or are you going to always coinsure MYGA?

Ted Johnson

One thing we want to point out Mark is that the coinsurance treaty that Eagle has with the team was scheduled to drop to 50% effective January 1 and that’s what’s happened. So that has dropped from 80% to 50% as part of the agreed upon terms and the agreement.

John Matovina

And you mentioned MYGA at the tail end of your question Mar; MYGA as an American equity have never been part of our strategy. They’ve been an accommodation to agents who are selling fixed index annuities and if a particular agent had a customer policyholder who wanted a MYGA policy, we wanted to at least have a policy available for that agent to place with us as opposed to forcing them to go to a competitor. MYGA policies are very rate sensitive and so the tenants of agent loyalty and relationships disappear in the MYGA space and it’s just not one that we’re interested in being in because the only way you really do have long-term success is kind of almost always have an highest rate.

Ted Johnson

And the coinsurance percentage on MYGA today is at 80%. It’s just on the FIA business it dropped to 50%.

Mark Hughes

Thank you.

Operator

Thank you. Our next question is from Dan Bergman of Citi. Your line is open.

Dan Bergman

Thanks, good morning. I guess following up on the initiatives and product enhancements in the coming months to make your products more competitive, is there any additional color you can provide to stay connect here particularly with respect to that revised FIA product you mentioned and the impact of including MVAs? I mean, I guess specially I just wanted to see if there is any sense you can provide on how much if any of that current gap and pricing to competitors you mentioned earlier that you’d expect these product changes to close?

Ron Grensteiner

This is Ron. We think by adding MVAs to our FIA's, certainly won’t put us at the top of the heat, but it will get us closer, instead of being 90 basis points to 100 basis points on a cap, we think that we can get maybe 25 basis points or 35 basis points closer to the top. So, at that point our producers will start remembering the value that we provide and excellent customer service and renewal rates and all this other stuff that we’ve built the company on. So that’s a plus there. On the income part, on the guaranteed lifetime income part, as you look at the competition today, we are about on an income basis, 80% of the number one income company, but we are about 98% of the company that would be ranked number two.

So there is a big cluster of us that are pretty close and our guaranteed income and then there is an outlier company that’s way above everybody else. We think we can put together a new lifetime income benefit rider for our FIA products that can maybe take us a little closer to the top of the cluster, so to speak, but we are not going to be anywhere close to the outlier company.

And the reason I talk about that is, if you look at us and rank us in the cluster, we might be ranked fifth or sixth or even seventh, as far as guaranteed income, but it’s in a very closed pack. So people that run these comparisons that will see a show-up and we are ranked fifth or sixth, if we can make little tweaks here and there and show up second or third, we could be selective more frequently then obviously then when you are ranked fifth or sixth.

Dan Bergman

Got it. Very helpful. Maybe just a follow-up, as we think about kind of the financial profile of these products from your perspective, is there any changes we should be thinking about in terms of expected returns or capital requirements et cetera in terms of revised products versus what you’re selling today?

John Matovina

No we’ve been, all the price testing we’ve done is looking at consistent profit measures with what existing products have.

Dan Bergman

Got it. Thanks very much. Appreciate, taking the question.

Operator

Thank you. Our next question is from John Barnidge of Sandler O’Neill. Your line is open.

John Barnidge

Thanks and congrats on the results. I have a question, do you think the IMO Exemption proposal were uncertainty with the deal role is adversely impacting smaller firms such that there could be M&A opportunities for AEL?

Ron Grensteiner

Well it’s certainly affecting the smaller firms and that they don’t have the infrastructure to be a financial institution and then when you look at the IMO Exemption it is over assumption it is very, very few IMOs that will even qualify for the IMO Exemption, so the way I look at it is that the smaller firms have to make a decision either get out of the FIA business or consolidate with the larger IMOs out there that do have the infrastructure and that that have the capability to be an FI, it’s unfortunate in that the DOL rule is almost turning to FIA business into a monopoly because there is going to be fewer and fewer IMOs if the rule goes through that have the ability to be financial institution than currently exist today. We’re going from hundreds of IMOs down to maybe I don't know 5 to 10 that could be an FI.

John Matovina

John you said that MA opportunity from AEL…

John Barnidge

For your consolidate smaller ones.

John Matovina

But we don't own any now, so what’s you’re…

Ron Grensteiner

That’s not really part of our - plan would be to be owning IMOs, I think we still are on the part that we don't want to own production and where the consolidation and the potential for M&A really happens is for the larger IMOs who do qualify for FI, they are either have the potential where they might be acquiring smaller firms or having striking agreements where somehow that production is rolling up underneath them and they are acting as the FI and they are getting paid for that.

John Barnidge

All right and then one follow-up, have you seen any Gold Eagle members leave the head of the DOL rule at all?

Ron Grensteiner

Well I don't think I can put a finger on that statistics. We have, our persistency is usually pretty good with our Gold Eagle members as far as retaining them from one year to the next, but I don't know of any numbers that I can point directly to the DOL about.

John Matovina

And John agents wouldn't leave. They might stop producing and that obviously would catch our radar, but - and our guys are monitoring production activity from sources and that don't hesitate to pick up the phone to call people, but I certainly haven't heard any commentary, I doubt that Ron has either about, we got these agents that are no longer producing for us.

John Barnidge

Great, thanks and congrats on the results.

Operator

Thank you. [Operator Instructions] Our next question is from Alex Scott of Evercore ISI. Your line is open.

Alex Scott

Good morning. I was just wanting to ask a question on the IMO Exemption and I guess more specifically around what portion of your sales come from maybe if you can give something on the top 10 or top 20 IMOs? In terms of size?

Ron Grensteiner

Our top five IMOs are responsible for about 52% of our sales and our top 10 are responsible for 78% of our sales.

Alex Scott

Got it. Okay. And one of the other things we saw in the IMO Exemption was just some commentary around product structure and I think I was specifically asking for comment on adjustments during the surrender period and whether that was sort of appropriate for IMOs to be selling, would something like an NVA be included in that, or what kind of, if you have any comments on what kind of product features that would be targeting?

John Matovina

Some of that commentary to me just kind of evidenced the DOLs lack of knowledge of what our products are and all of that. The ability to adjust rates during the surrender period is part of natural product design. We've said repeatedly that particularly on index annuities, our pricing sets an option budget at the start, or at the time of product issue and we buy a 10-year bond or whatever it is to fund whatever rates we can offer, but the index terms are going to be influenced in subsequent periods by what’s going on in the market because option prices are dictated by market volatility and other factors.

So while we might have to change our caps and participation rates is going to be because of factors that are not necessarily, that are outside of our control. So, I think as I read that, one example of not having a very good grasp of what the product is and how it’s designed and the policyholders have lots of options and the companies do to, so it’s part of overall product structure. MVA's, your question on MVAs, I mean MVAs in effect doesn't happen during the operation of the product, it happens when somebody elects to surrender or receive cash outflows prior to the expiration of the surrender period.

Alex Scott

Understood. Okay, thank you.

Operator

Thank you. And that concludes our Q&A session for today. I’d 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

Ladies and gentlemen thank you for participating in today's conference. This does conclude today's program, and you may all disconnect. Everyone have a great day.

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