May 26, 2008
Operator
Welcome to the American Equity first quarter 2008 earnings call. (Operator Instructions) For opening remarks and introduction I would like to turn the call over to Julie LaFollette, Investor Relations.
Julie Lafollette
Welcome to American Equity Investment Life Holding Company's conference call to discuss first quarter 2008 earnings. Our earnings release and financial supplement can be found on our website at www.american-equity.com.
Presenting on today's call are John Matovina, Vice Chairman, Kevin Wingert, President of the Life Company and Wendy Carlson, Chief Financial Officer. Some of the comments made during this call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act.
There are a number of risks and uncertainties that could cause actual results to differ materially from those expressed or implied. Factors that could cause the actual results to differ materially are discussed in detail in our most recent filings with the SEC.
An audio replay will be available on our website shortly after today's call. It is now my pleasure to introduce John Matovina.
John Matovina
It’s a pleasure to be with you this morning. As reported yesterday afternoon operating income for the first quarter of ’08 was $17.7 million, a 17% increase over $15.1 million in the first quarter of 2007 and $0.31 per diluted share.
Before my associates get into some of the detail, I would just like to kind of remind you some of the specifics. At American Equity we look at our business as fairly simple things and details you’ll hear on this call are going to be inline with those themes.
We want to go our assets under management and Kevin will talk to you about the favorable sales results we had in the first quarter and our prospects for continued favorable sales results or an acceptable spread which it did improve in the first quarter and Wendy will go through the details of there and of course maintain a high quality asset portfolio and Wendy will also cover the details about that. So, with that I will turn the call over to Kevin.
Kevin Wingert
First quarter 2008 was a great quarter, $515.2 million of production up 16% from the first quarter of 2007 at $444.5 million of production. Monthly sales for both March and April were up over $200 million; April was our best production month since I believe December of 2005.
So, we are having very solid production results at this point, a lot of activity out in the field. It’s a lot of things going on.
Maybe I hit some of the meetings to start with. We have been at a lot of NMO meetings; we have touched well over 2000 agents since the beginning of the year.
Had 20 plus NMO sponsored meetings, had certainly good results, good support from the NMO’s with service, good quality products still being a theme from American Equity. If you look at other meetings in other ways that we have touched the agents, we had our Million Dollar Producer Forum out in Las Vegas again this year.
We had 300 producers at that meeting, those producers would have represented probably close to a billion dollar of production at that meeting. I think the meeting was very, very well received.
We got good responses. We are now working hard to get production out of the people that were at that meeting and about a third, maybe a little more than a third of those producers were producers who had written in the last year with American Equity, so we think there is some good upside potential there.
We have got road shows that begin this week using Jack Marrion from The Advantage Group. I would expect that we will touch 600, 700 agents or more in those road shows over the next three weeks, with a theme of talking about American Equity’s product, our income, our riders and the ability to guarantee income for both Baby Boomers and Senior’s in their retirement years and Jack will be doing some training on behavioral selling.
So, I think those meetings will go over well. We continue to have Producer Forums here in the Des Moines.
We have had approximately between 215 and 300 agents in the office, so far this year and I would expect we will get up over 700 agents by the end of the year through the Producers Forums. We are getting a lot more demand from our NMO’s to bring Producers into Des Moines.
Let them get to know the company kick the tiers, here our story and we are able to then turn those agents into either new production or for increased production from those folks that are already writing business with us and in fact we have got two groups in Des Moines today. Next week I will be in Chicago.
I’ll be in front of approximately 275 agents from a couple of different groups like marketing groups that are good supporters of American Equity. So, there is a ton of activity going on out there which I think spells good news for production, on a going forward basis.
The Gold Eagle Program as you recall is the agent stock option and co-op marketing program. We had approximately 500 agents who qualified for that in 2007 and we are up at approximately 450 of those agents, maybe a little more than that of written business again this year.
So, we are doing a pretty good job of holding agents with that program and we are working hard. I have got my field marketing guys focused on keeping those producers on targets and one on of the challenges our industry faced historically was that only about half of the producers that were producing any particular calendar year, we produced the following calendar year.
So, we are very optimistic that if we can keep these Gold Eagle Producers which are million dollar plus producers with American Equity. If we can hold the high numbers that we are looking at now and keeping those people in production, it will help us not only keep production flowing year in and year out, but allow us to increase production as we bring more people into the Gold Eagle program.
Ron Grensteiner, Senior Field Marketing VP is focused on bringing new Gold Eagle members in and here in about four to five weeks has got two groups of 35 potential Gold Eagle members guys that are riding with this, but do ride the kind of volume we need for them to get into the Gold Eagle program coming into Des Moines. So, we have got a lot of great activity; we are getting in front of producers developing those relationships and certainly I think that all of those things are very, very positive.
On the product side as you know, we have been running a commission incentive that runs through June 30. We are still analyzing that to see what we will do in the second half of the year but I think that program has certainly got us inline with where the competition is from a compensation standpoint.
Taking objection off the tables as it relates to the commissions where we may have had a competitor or two above us. So, I think it’s certainly helped to open more doors for us and been a successful program and as we said here today, I do think that we have got some positive things going on, on that side of the business particularly in the first six months, but maybe even as we look at the latter half of this year.
Our cost of money has been more manageable this year than it was a year ago, so we have been able to bring our cost of money down. I think Wendy and certainly John will talk about that later, but we are also seeing some opportunities on the investment income side of this steeper yield curve.
I certainly think it’s helped as we look at investing the dollars as they come in as well as to market opportunities where folks have maybe opened up some investments that we could take advantage of because of their need to access cash and our ability to generate cash on a going forward basis. Also as we look at the income rider, the income riders are beginning to give some real good attraction in the market and I think the income rider as we look out in the future we will generate potentially some additional fee income beyond what we need to fund that liability going forward that would give us some additional funds to work with there.
So, I think there’s a lot of positive thing as we look at the second half of the year. We haven’t been announced that we are going to do anything with the commission increase, but I think we are well positioned to take advantage of any opportunities that we see in that particular area.
On the income -- product side, income side, the product side has been pretty steady. I think our portfolio is very competitive with good flexibility; good benefits and certainly a good choice of products in terms of ranges of surrender terms, commissions, bonuses those types of things.
The area where we have been focusing, as you know is on the income riders; the new income rider was kicked out in March with a 7% growth on the income rider and the 40 basis point fee. That got us a lot of attention in the market.
I think it has done well for us, as we have been able to get the administration of that and get the field used to proper forms in that. We are seeing between 35% and 40% of the apps taking advantage of that rider.
I think it will probably stabilize in that area; could trickle a little higher. A part of the challenge with it is when you have to get the field for us to sign new forms, it slows the process of getting it really oriented and used maybe as widely as it could be used.
We’ve also just announced and I’m really excited about this because it’s getting us a ton of attention and I think it’s really going give us a nice kick in activity, getting the phones ringing, getting people looking at American Equity. We have announced the new version of the income rider.
We had anticipated from a competitive standpoint that at some point this year we would have to do some new things and so our pricing had looked at various options going forward and one of the options we had looked at was taking that accumulation value on the income portion of the income rider from 7% to 8%. We had considered doing that earlier in the year, but we decided to hold the 8% back and use it at an opportune time.
From a competitive point of view we decided that now was the time as of May 1. So, on May 1 we introduced an 8% accumulation on the income rider, raised the fee from 40 to 45 basis points, which we were very comfortable.
It is a conservative number meaning it’s a positive number from our point of view, on a pricing standpoint. So, that that announcement is really got the bell is ringing.
We only had one competitor that was at that number, Midland previously; so we’ve been able to match them and certainly exceed our competition there and I think we will see some good benefits there in production on a going forward basis. Competition beyond that, I guess there is really a couple of things I would look at on competition.
Allianz just announced that they were going to increase their 15% bonus to 20% which is an income rider only bonus. Effectively what that income rider does is it makes what would be a traditional annuity a two-tiered annuity.
With our products, our up-front bonus is included in both the account value and the income value because the products are priced for an upfront bonus. Allianz’s product, it’s a walk away 10-year product; it’s just that none of the bonus which is the sizzle or the product is included in that walk away value.
It’s only included in the income value, which effectively turns the contract into a tow-tiered annuity. Because of the sizzle, the benefit that’s being sold is only available through an income provision and so it is certainly a different approach to sales.
It’s more inline with where they have traditionally been and I think that certainly we can differentiate ourselves and compete very well in that area. The other product and some of the pricing that’s going on; it’s a little bit of a challenge is I think it’s maybe an anomaly in the market for a period of time.
What we are seeing in this product similar to our bonus Gold, which is a 10% premium bonus product with a total compensation if you include all over rides and commissions in the area of 11%. So you’ve got approximately 21% of acquisition costs all in.
American Equity’s bonus gold spreads out over a 16 years surrender charge period and we’ve seen some competition particularly Aviva, take that same pricing parameters, same numbers to 21% and now put it on a 10-year surrender charge. I believe it’s obviously an attempt to grab market share.
It’s something that we haven’t seen in the market for the 20, 25 years that I’ve been in the market where we add a relatively low point in interest earnings on the underlying assets and we are seeing the highest acquisition costs that we’ve seen put on a relatively short surrender charge. So, those three things in my mind don’t seem to match up and I think the place that probably ultimately suffers, is underlying rates to the consumer.
Those products are starting out, for example their fixed rate is 2.75 versus 3.25 fixed rate, so it looks to me like you probably on a product like that, you got to target a 3.25 to 3.50 spread versus approximately 2.75 spread that American Equity may operate on that type of a product. So, I think that you have potential for consumers to be unhappy out here in the future when they are faced with poor renewal rates on a relatively high surrender charge product for a period of years, starting out in the second and third year.
So, it’s an approach that I don’t feel particularly comfortable with; I don’t think American Equity feels very comfortable with loading up those types of acquisition costs on that short of a surrender term, our type products. So what we are really selling to the field force, to the agents is a more competitive rate going forward, better renewals rates which we’ve traditionally had solid renewal rates on a product that’s priced; I guess in our minds what would be more appropriate for the marketplace we are in and certainly more appropriate for the way products have traditionally been priced and looked at from a spread management standpoint.
Final piece is pending. Our pending has been in the area of 2450 to 2550 over the last six to eight weeks, so pending has been pretty steady, pretty solid, cash ups coming in the door have been pretty strong for the last four or five weeks and so we are pretty -- we feel pretty good about where production is and we are just working to move that pending up even further.
So we feel pretty good; a lot of activity, exciting things going on out there and we are out working hard and I feel pretty good about where we are at on the production side. I appreciate your time and I will turn it over to Wendy.
Wendy Carlson
As John indicated we were very pleased with the results for the quarter, both in terms of earnings and sales. I would like to begin the discussion speaking to our spread result through the quarter.
We were very pleased to see the spreads moving again in the right direction. The aggregate spread was 259 basis points, which is an improvement of 11 bps over where we were for the fourth quarter of ’07.
Our results are typically driven by our indexed business; 85% of total reserves and throughout ’07 that we saw the cost of money on our Indexed business steadily rise. That’s now starting to come in again.
Our Index annuities for the first quarter was at 358 basis points compared to 374 for the fourth quarter, so about 60 basis point improvement. The spread on that business then calculates that 256 basis points compare to 243 for the fourth quarter of last year.
So essentially we are back to the level we were at in the third quarter of ’07 and as we look now out to the rest of ’08, we have reasons to be optimistic. When we think about our cost of money, the cost of money we reported in any quarter is a reflection of the costs that we have expanded for options during that current quarter as well as the preceding three quarter since we expense those options over their one year term.
As we look at purchases we made in the first quarter our estimate of the cost and the maximum cost of money on the Indexed business was approximately at 330, so significantly reduced and we expect those purchases in the first quarter to benefit our cost of money and keep our cost of money moving downwards throughout ’08. We were pleased to see that cost at that low level in the first quarter despite the fact that the mix remained quite high through January, February and March.
It was up in the high 20’s at time up above 30. So, we felt that our rate cut had been effected in bring our cost inline despite the continued high volatility.
The decline in interest rates was also helpful in the first quarter as it brought option costs in as well. As we look now and thinking about the second quarter, if you have been watching the VICs, you’ll know that throughout the months of April it continued to comedown, which should help us with the management of our cost of money for the rest of the year.
In ’07 there were a couple of quarters where we discussed the effectiveness of our hedging and lining up option gains with interest credit for the policy holders and I am sure you recall we took a variety of step throughout ‘07 to enhance the overall effectiveness of the option program. In the first quarter we found that the results were on track with our expectations and so we are satisfied that the improvements that we made in ’07 are having the right effect.
I’m turning now to invested assets and investment income; the yield for the quarter was at a 6.14%, our overall net investment. Income increased to $195.5 million, which is up from $191.1 million in the fourth quarter of ’07.
The really interesting thing in the first quarter was the opportunities in terms of our new money investments. It’s been a very rare time in the market where despite falling rates, we are seeing credit spreads at really very wide levels and they are very attractive buys in the market.
We put to use over $1 billion worth of money in new investments in the first quarter. On our new bond purchases, we achieved a yield of 6.61% on over $900 million worth of investment and in our commercial mortgage loan portfolio; we earned a new money yield of 6.2% on a little over $100 million of new purchases.
The purchases were made both with the net premiums from new sales as well as calls and sales of existing securities with declining rates. We saw a significant level of calls in our agency portfolio and we had some opportunities to make some sales at attractive levels, so we had a total of $738 million of proceeds that came from existing securities called or sold.
All securities have an average yield of 5.59%, so we saw a significant pickup in yield on those new investments. We’ve seen that trends now continue into the second quarter, with the trend of calls continuing, but the opportunities to put the money back to use at higher levels continue to be out there.
We really feel well positioned to take advantage of that. It’s definitely a buyer’s market, because we’ve had our strong commitment to credit quality over the year that positioned us to take advantage of it, because we’ve got very strong liquidity and because we’ve avoided some of the problems such as in the sub prime market.
We have no sub prime mortgage-backed securities. So, unlike some others who’ve had to take write-downs and whose liquidity has been impacted by it that now it’s turning out to be our day.
We’ve been able to achieve some diversification into new asset categories, because of the wider spread, without sacrificing any credit quality. As you look at the table in our supplement that shows the credit quality of the portfolio you will see that it’s been maintained over 99% investment grade with over 90% of our fixed income securities rated A or higher.
We have expanded our a watch list during the quarter due to market value declines in several industries, as well as the slowdown of the overall economy. So, as you look at watch list, you can see securities in various categories with the amortized costs of $90 million, market declines of $35.2 million for a value of that set of securities at $54.8 million.
Even with the expansion in the watch list however, our experience on realized gains and losses during the quarter, was very good. The net realized loss was $1 million, which is net of tax and DAC.
We did have the two securities that we wrote down, which is within that realized loss balance, but really a very immaterial amount relative to our whole balance sheet. Other items of the note in our earnings for the quarter, we had a decline in product charge revenues of approximately $700,000 from the fourth quarter to the first quarter.
That results from a reduction in surrenders subject to a surrender charge; it was $89 million of surrenders subject to a surrender charge in the fourth quarter of ’07 compared to $76 million in the first quarter of ’08. That’s a positive trend from our standpoint.
Persistency is good, the surrender charges are vigorous in measure of the duration of the liabilities and they help us invest in longer-term asset that benefit the policyholders through more comparative rates as well as helping us manage our business by being able to predict the duration of the liability, so the improved persistency is good. Other costs and expenses were up somewhat during the quarter.
They were up $1.3 million in the first quarter compared to the fourth quarter of last year. Roughly half of that increase is related to legal expenses and those expenses stem from the completion of our settlement with Minnesota and gearing up for certification issues in a couple of the other cases.
The remainder of the increase in other costs and expenses is the uptick in non-deferrable marketing expense that we typically see in the first quarter from all the types of activities that Kevin was describing earlier as well as some increase in personnel expenses. Book value continues to increase.
Our book value per share excluding the accumulated other comprehensive loss was $12.66 compared to $11.56 at the end of the year. That particular calculation is being affected by the FAS 133 adjustment as well which I will talk about in a minute and as you may recall at the end of last quarter we began publishing a book value that excludes both the AOCL as well as the FAS 133 impact.
Coincidently, both measures, the book value this quarter are at $12.66. Our adjusted debt to cap ratio declined during the quarter to 28.7% and that’s true despite the fact that we’ve borrowed $20 million on our line of credit to fund our repurchase program in our common stock.
We now repurchased a total of 2.3 million shares at an average price of $8.64, so that has been positive with our book value. The borrowings for that of $20 million have an average interest rate of 4.79%, so an attractive interest rate.
I would note that we also repurchased during the quarter $20 million of our convertible senior debt, repurchased it at a price that was a discount to par. That debt carries a cash interest rate of 5.25%, so by retiring $20 million of senior debt there was no change in the overall level of the debt even with the borrowings on the line of credit and some improvement in our overall interest costs.
As we look to the repurchase program now for the balance of ’08, we are at presently in wait-and-see mode. Certainly, the price of the stock is still very attractive as a buy trading at a discount book, but with the improvement in sales and the trend towards increasing sales we want to see where that’s going and we would really prefer to use our capital to support accelerating sales growth.
So, we will take a pause now in the repurchase of our common stock. Our capital ratios have remained very sold still over 400% of company action level, is our RBC ratio.
We would have slipped to slightly below 400% in the first quarter as a result of the sales growth, but there is a component in that calculation that has to do with interest rate scenarios and with declining interest rates that helped us keep that estimated ratio up over 400%. Our GAAP income was very impressive this quarter at $49 million and that has to do with a change in accounting rules and a change in valuation of the imbedded derivative within our indexed annuity reserves.
We adopted FAS 157 affective beginning of this year. FAS 157 deals with fair value measurement and it ties into our fair value calculations under FAS 133.
We were required under FAS 157 to use a higher discount rate in the calculation of those reserves and reduce in the past which caused a significant decline in the overall value of the FAS 133 reserves and that translated into a significant increase in our GAAP income. So, in some ways those GAAP numbers become more obscure with each of these new accounting changes.
I would like to conclude by focusing on an event that we have coming up here in the next couple of weeks. We have our first Investor Day ever that we will host in New York on Tuesday, May 20.
That will be at the St. Regis Hotel beginning with launch at noon and then continuing with presentations in the early afternoon.
We will be bringing to New York for that a larger group from American Equity including several members of our investment staff, as well as accounting and internal control and of course Kevin will be there to speak to marketing. So, I am sure you’ll want to hear what more that John and Kevin and I have to say, but it’s an opportunity to hear some of the other folks from American Equity speak about the company as well and we would invite you to register for that conference through our website and with that I will turn it over for questions.
Operator
(Operator Instructions) Your first question comes from Randy Binner - Friedman, Billings, Ramsey.
Randy Binner
Wendy you touched on the other expenses and costs. What’s a good run rate for us to think about on that?
It was up to 12.5 for the first quarter ’08.
Wendy Lee Carlson
It’s hard to predict a run rate given that we have got some various things going on during the year. It’s hard to predict when the legal expenses are going to hit, in any given quarter and we do have some significant events coming up in terms of certification hearings in those cases.
So, at the level that they are now, certainly we wouldn’t expect them to increase significantly over that. So, if you look at the first quarter as an indicator of what the run rate would be for the year, that’s probably a conservative way to look at it.
Randy Binner
Okay, but that would be almost $1 million higher I think than the previous run rate right.
Wendy Lee Carlson
I said it’s conservative.
Randy Binner
There is some upfront spending you did on the class action stuff; did that help to offset that as we go through ’08 right?
Wendy Lee Carlson
Right.
Randy Binner
The amortization of sales inducements, I mean that’s -- that level of amortization is just tied to the overall level of profitability we see in the quarter. I mean is there a way to think about that going forward beyond that.
Wendy Lee Carlson
Well that’s related to the growth and the aging of the business and so all things being equal that should follow a fairly steady trend. We evaluate that every quarter to look at the assumptions in our DAC model relative to our actual experience and from time-to-time we’re required to modify our assumption to true those up to the actual experience, but setting aside those kinds of things, the type of trends that you seen in our DAC amortization and our bonus interest amortization should remain fairly constant and that’s been in general a trend of increasing expense from quarter-to-quarter of $2 million to $3 million.
John Matovina
I mean the fact is we are continuing to sale products with fairly high acquisition costs. This the product Kevin mentioned; the Bonus Gold with a 10% bonus to the policyholder and a pretty much all-in cost of 21% represents three quarters present of our sales and has now for the last couple of years.
So, as that business replaces business from 5 years or 6 years ago that didn’t have that level of acquisition costs, you’re just going to see the trend move up some to and the trade off for that is we’re looking for higher spreads in that business to cover the higher acquisition costs and from earlier product designs where they weren’t so high.
Randy Binner
And so, I will go in the queue after this; but so I mean I guess to offset that in the model here, I mean you are thinking that your investment yield because of the new money opportunities you have talked about; I mean that’s a sustainable trend upward through ’08. I mean do you continue to see improvement in the overall yield you are be able to get.
John Matovina
Well at the moment we think we can, we don’t know what market conditions would be like 30 days, 60 days, 90 days from now, but growth...
Kevin Wingert
I think where John is going there is historically we look at these products probably is about a 250 spread with some of those newer products like the Bonus Gold we have really try to push ourselves to 275 spread, because of the higher acquisition cost.
Operator
Your next question comes from Mark Finkelstein - FPK.
Mark Finkelstein
Any chance you will give us the cost of money in April?
Wendy Lee Carlson
That I don’t think we've got a good way to estimate that. Other than telling you where we've been purchasing options and that’s a very limited snapshot, but the option costs have remained very low and in some cases even below the 330 that I mentioned in my earlier remarks.
So, keep in mind that that’s four quarters worth of option cost and so it's reflecting the current experience as well as the prior quarters and so it will take a little time for that to continue to come down assuming those costs remained low.
Mark Finkelstein
Okay and I guess just with the decline in the VIC's and I guess other re-pricings that you did in 2007, are you starting to get pressures, from a crediting standpoint maybe going the other direction and I guess how are you thinking about that in terms of current cost of money?
John Matovina
Yes, you need to break it out into two pieces; one is renewal business and the other is new money business. At this point I haven’t really felt when I say I have just been out in the field; I haven’t felt any pressure on renewal rates particularly.
I would call the pressure on new money rates fairly slight at this point, maybe a little bit of pressure there, but as Wendy said we are able to get some better returns on the asset side right now as the new money comes in the door, so if we do need to move I would think it will probably be new money on select crediting strategies, but I think we can still keep our cost of money in pretty good shape and probably in real good shape compared to where we are able to put the assets out right now.
Mark Finkelstein
On the living benefit or the lifetime income rider that you do have, are you still fully reinsuring the longevity risk of those products?
John Matovina
At this point we are not fully reinsuring it. We feel that there is some profit in there that we would like to keep ourselves.
Kevin Wingert
Well, we do have a reinsurance program under consideration for the new rider, but hadn’t been put in place yet.
Mark Finkelstein
The new product, they call it the 40 or I guess 45 with the 8% rollup, what is the spread roughly between that rider and the reinsurance costs and should we think about that as excess spread above kind of you’re target or is that being built into the overall pricing?
Kevin Wingert
I don’t think we've negotiated totaling that cost with the reinsurance, so we will not comment.
John Matovina
At this point we don’t want to give them any, but I would anticipate there will be some spread there.
Wendy Lee Carlson
We have not built in any spread on that rider in our overall spread expectations. So we are going to wait and see how that emerges.
Mark Finkelstein
How do we think about that product from a capital standpoint, what are the strains that we should be thinking about both on a reinsurance and a non-reinsurance basis?
Kevin Wingert
I wouldn’t think there is much of any stat capital strain. I mean what you are really looking at there is an extension of benefit pay out period that the rider in and of itself isn’t going to cause any stat capital strain.
Well quite frankly, the biggest stat capital strain in my mind comes from the existing penalty free withdrawal provisions where under statutory stat rules you have to assume the 100% utilization of that 10% penalty free withdrawal and these lifetime income benefit riders given the elective nature of them, they fall into something called a non-elective benefit. So, I think the strain is already there from the existence of the existing contractual feature for 10% penalty free withdrawal.
Operator
Your next question comes from [David Levine - Selected Capital].
[David Levine
Just a quick question on the balance sheet and I apologize to the other callers; I am new to looking at your Company; why is your business model to leverage your investments few more than two times some of your peers and I am not trying to take a jab, I am just trying to understand.
Wendy Lee Carlson
No, I think what's difficult for somebody new picking up our balance sheet is that, we purely sell annuity products and when you put an annuity reserve into your liabilities, the capital level that’s needed to support that is well on a statutory basis somewhere in the 6% level. So, you see a much higher level of leverage just because of the nature of the business and we are purely in the fixed annuity business, so I think that accounts for some of it.
As you look at the true leverage which is the leverage that relates our borrowed money to support our overall capital, as we talked about earlier that 28.7%, that’s an adjusted debt-to-capital ratio and when we say that adjusted debt is taking into account the equity portion of our trust preferred securities that are reflected as the subordinated indebtedness on our balance sheet. So, at a 28.7% leverage ratio that’s completely inline with our ratings and probably would suggest a higher rating than we currently carry and is not significantly above our competitors.
Operator
Your next question comes from Beth Malone – KeyBanc.
Beth Malone
If you look at the market environment that we have right now with lower interest rates and unstable kind of poor returns on the stock market, is this environment similar to a previous period. Again you see how demand for the products reacted previously.
I mean does this look like 2005 or something in terms of its market conditions and demand for the product?
John Matovina
I would think it would be a lot closer to the time periods when you go back to 2000, 2001; you had CD rates falling, you had the stock market struggling, you had tough press going on that, so I would say that would be true to some extent. The yield curve is struggling to straight now, that’s started to help us and I think as we've moved out of the, the flat yield curve we are starting to get some benefits from it.
On the other side I think a solid market for our business, but it’s still a pretty uncertain market out there, just because of the way the press and so forth is. So I think we are going to make good head way, I think these income riders will help us a lot as people look at trying to lock down their retirement income.
So, I am optimistic this is going to get better. I think that one of the challenges we face right now as I talked about earlier were some of this product pricing, that in my mind just isn’t logical, isn’t supportable necessarily but you have got to deal with it out there, so that would probably be a bigger challenge for us in this market than anything else.
Beth Malone
On the distribution, you have about 52,000 agents now and that’s been a steady number for a while. Is there any thought to going through and reducing the number of agents in order to improve the expense cost?
Kevin Wingert
Yes that process has started Beth. We have started going out to agents who have been non producers, giving then an opportunity to send us an app or we'll start the termination, so I would think that you will start to see some modest reduction this quarter, with probably some acceleration in the reductions as we go through the rest of the year and some of that could be offset by new recruiting but you will start to see some numbers coming down.
Operator
Your next question comes from Bill Dezellem -Tieton Capital Management.
Bill Dezellem
You had referenced, you have some important class action certification hearings coming up, were there any in the March quarter that were note worthy.
Wendy Lee Carlson
There was a hearing that was begun, but without all things legal, its dragged out, so the first half of it was held, if I remember right early in March and then, there was another half that was held here recently and the outcome of that has been postponed until yet another hearing on a motion for summary judgment that we are filing and that will happen in May. So yes there were developments in that case.
The certification process and the other California cases just now beginning a motion for certification was filed by the plaintiffs and we are in the process of filing our opposition but that will extend out over a period of several months.
Bill Dezellem
In the press release, you had mentioned a number of reasons why you were seeing a success in your growth in new business, but you did not mention agents moving away from some of your competitors that have had regulatory problems. To what degree is that a reason for sales growth and how important do you view that in the overall big picture?
Kevin Wingert
I think that obviously Allianz has had some press that has been less than flattering over the first quarter, end of last year. So I do think we have picked up some significant gains there.
It’s a little bit hard as you deal with an agency group of 50,000 agents and in any given quarter 2000 or 3000 who send you an app to identify which ones are moving specifically from Allianze, but I do think that as I am in the field talking to producers, I do talk to a fair amount of guys who said that they just don’t want to deal with it any more and they are looking for an alternative. One of the other things that I have heard, although I have not seen this in writing is that possibly Aviva has replaced Allianz as top producer in this quarter and some of that, I would anticipate given their pricing would be driven by Aviva’s aggressive product pricing, but I think a part of it is also driven by maybe some fall off in production by Allianz, so I do think that has had some effect and I am sure, we have been a beneficiary of some of that production.
Its not always necessarily the best to be number one at least Allianz was so far ahead of every body else that I think they have drawn a lot of attention to themselves and their products given the two tier nature of them, I believe some opportunity for a criticism out there.
Bill Dezellem
And then finally, as you look out over the remainder of 2008 and we understand that it’s early, but would it be fair to say that the first quarter should be your lowest operating income quarter meaning the $0.31 due to fact that your spreads are stable to improving and your invested asset base is growing?
Wendy Lee Carlson
Well, as you know we don’t give guidance but as you look at the historical trend that has typically been true; that the first quarter is our lowest quarter and then with additional production and now with our hopes for improved spreads, we would hope that that would be the trend.
Operator
You next question comes from Randy Binner - Freidman Billings, Ramsey.
Randy Binner
Yes thanks; just a quick follow-up question on the commercial mortgage portfolio. I didn’t see a lot about it in the sub; can you give an update or any color on that as far as LTDs, delinquencies and how that is holding up in the soft economy?
Wendy Lee Carlson
Sure, you didn’t see it mentioned because there was nothing new to report. We have continued to build the asset class, we have no default delinquencies or restructuring, so it continues to perform perfectly and we have no reason to be concerned about it and every reason to continue to think that that’s a very good asset class for us.
Randy Binner
Do you have an update on LTD or is it just similar to where we were before?
Wendy Lee Carlson
It’s similar to where it was before; I think it was at 67%.
Kevin Wingert
67 or 68 –
Wendy Lee Carlson
Yes, I don’t know if any change from that.
Kevin Wingert
That the investor presentation that we use for our meetings and that will be updated with the next couple of days and it will posted on our website and there is a page in there with some of those statistics you were asking about Randy.
Operator
And at this time we don’t have any further questions in the queue.
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.