Feb 23, 2012
Operator
Welcome to American Equity Investment Life Holding Company's Fourth Quarter 2011 Conference Call. At this time, for opening remarks and introductions, I would like to turn the call over to Julie LaFollette, Director, Investor Relations.
Julie LaFollette
Good morning, and welcome to American Equity Investment Life Holding Company's conference call to discuss fourth quarter 2011 earnings. Our earnings release and financial supplement can be found on our website at www.american-equity.com.
Presenting on today's call are Wendy Waugaman, President and Chief Executive Officer; John Matovina, Chief Financial Officer and Vice Chairman; and Ron Grensteiner, President of the Life Company.
Julie LaFollette
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 Wendy Waugaman.
Wendy Waugaman
Thank you, Julie. And good morning.
Welcome to the call. We're very pleased to have reported last night excellent results for the fourth quarter of 2011, with operating earnings at $32.6 million or $0.52 per diluted share.
The full year was also very good at $133.7 million in operating earnings or $2.12 per diluted share. That makes it a record year, and actually, it's another record year, capping several years now very strong growth and very strong operating results for the company.
We attribute these results to careful spread management throughout the year both in terms of asset management as well as steadying rates to new policyholders.
Wendy Waugaman
Last quarter, we discussed the fact that the cost of holding higher-than-normal cash balances during the third quarter had a negative effect on our spread results for that quarter. Those cash balances were invested in the fourth quarter, and that helped us keep our spreads for the fourth quarter at our target level.
We're very pleased to have achieved our target spreads throughout the year despite a very challenging low yield environment and a very challenging investment environment for fixed income securities.
Wendy Waugaman
As we look to 2012, our #1 issue will continue to be spread management as the low rate environment is expected to persist long term. To combat this, as we announced last quarter, we've implemented both new money and renewal rate adjustments on rates available to our policyholders.
As a reminder, the renewal rate adjustments take effect on policyholder anniversary date. That means it takes a full year for any type of adjustment to be fully reflected in spreads.
Thus, as we look to 2012, spreads should reflect the benefits from this adjustment emerging throughout the year. Should rates go even lower, as John will discuss in his comments, we do have additional room to take rates to policyholders lower both in terms of new money and renewal rates should that become necessary.
Wendy Waugaman
Turning now to sales. We really felt great about the sales for the year at over $5 billion.
We think that reflects the continuing strong demand for safe money products in this volatile market environment. We think it reflects the very low interest rate environment and the fact that competing rates on products like CDs remain very, very low.
And of course, we always look to our strong distribution relationships as well as our culture of customer service in every department in the company.
Wendy Waugaman
As we turn now and look at 2012 in terms of our outlook on sales, we are cautious. New money rates to policyholders are at the lowest rates in our history.
They are still competitive with other fixed annuity products. They are still competitive with other alternatives available in the market such as CDs, but rates are at lower levels than we've ever seen them.
Should sales be dampened by low rates, there are potential offsets that might work to drive sales upwards. Those things include new support for annuities in very high places such as the recent announcement by the U.S.
Treasury and Labor Department concerning initiatives to expand the availability of annuities in retirement plans. We also watch very carefully what's going on in Europe and the potential challenges for some of our European-owned competitors, including Solvency II and its potential for much higher capital requirements for European competitors, as well as some of the concern over sovereign debt holdings by those peers.
Wendy Waugaman
There's been a lot of discussions concerning new entrants into our market, the index annuity market, and the potential for increased competition there. In the fourth quarter of 2011, Wirehouses announced that they've reached arrangements with existing index annuity writers to market their products.
To quote one of their executives, they've now seen the light. Apparently, Hartford, or maybe I should say The Hartford, has also seen the light and announced 2 new index products that they began marketing in the fourth quarter.
That was a particularly interesting development since Hartford was one of our biggest opponents in the 151A fight. They now have elected to join us.
Early sales reports for the fourth quarter indicate that Hartford sales were $370,000 during the quarter, so we'll be watching how quickly they ramp up sales to see if, in fact, they've become a competitive factor.
Wendy Waugaman
We do believe that new entrants into the market add a new level of visibility for the products. We think it helps endorse the concept of guarantee to account values with market-linked interest and lifetime income.
We feel very solid in our competitive position, certainly in our traditional distribution channel, the independent agent channel. We don't think the new entrants will diminish our competitive position.
We also think that the interest in index annuities in the securities arena highlights the opportunity for Eagle Life to enter the BD channel and continue to diversify its distribution. Work on Eagle continues slowly.
We do have a significant relationship with a national retail broker-dealer that's in place. Sales can begin at any time there.
Now it comes down to good old competition, good old-fashioned competition on rates and rates available on competing index annuities offered through that firm.
Wendy Waugaman
With that, I'll turn it over to John to discuss our operating results in detail.
John Matovina
Thank you, Wendy. And good morning, everyone.
As Wendy commented, investment spread for the quarter was 2.97%. That's up slightly from the 2.95% that we had in the third quarter, and the changes are largely due to getting those cash balances invested in the fourth quarter.
The cost of cash was 11 basis points in the third quarter and down to just 3 basis points in the fourth quarter. The average cash balance has declined from $496 million to $166 million, and that's going along with that the benefit from over-hedging was also reduced from 5 basis points in the third quarter to 2 basis points in the fourth quarter.
And the over-hedging benefit largely results from our position to make sure that we're adequately hedged or fully hedged on the exposure, and in the event that the options pay off, some of that comes back to us. The reduced benefit in the fourth quarter is attributable to the fact that the index credits or the success in the options was less than what we had in the third quarter because of what was happening in the market.
John Matovina
The rate adjustments that Wendy referred to for new policies took effect on October 8. Because of the way those get phased-in, probably more likely an effective date of November 1 before substantially all policies would be issued at new rates.
The renewal rate adjustments took effect beginning November 15. And as Wendy said, those will take effect on the policy anniversary dates as those policies cycle through.
And we really didn't get much benefit from the renewal rate adjustments in the fourth quarter, but that should emerge throughout this year as those take effect.
John Matovina
If rates do move lower and the calls of agency securities, together with new money, force our investment yield to lower levels, we do have lots of capacity to adjust rates. I think we can safely say that we could absorb a 75 basis point decline in our overall investment yield before we would hit our minimum guaranteed rates and start experiencing some spread compression.
That's a pretty good margin, and we're hopeful we don't have to resort to those types of actions, that the rate environment will stabilize and, ultimately, over the longer term, start moving up.
John Matovina
The aggregate yield on invested assets for the quarter was 5.76% compared to 5.70% in the third quarter, and that's going to be largely due to the investment of those cash balances and putting those, or the yield on those into the equation. Yields on new investments in the quarter were lower.
We purchased about $1.3 billion of fixed income securities. The weighted average yield on those was 4.3%, including $610 million of agency bonds at a blended rate of 4.18%, $486 million of corporate securities at 4.52% and then $217 million of municipal bonds at 4.16%.
For the full year 2011, we purchased $6.9 billion of fixed income securities with a weighted average yield of 5.10%.
John Matovina
Looking at the portfolio and the fact that we've been talking about the temporary cash investment situation, that situation is something we'll be facing again in 2012. The resetting of rates back in the third quarter to new levels means we've got a fair amount of call or redemption risk, particularly in the first 3 quarters of this year, $1.9 billion in Q1, $754 million in Q2 and another $900 million in Q3.
Those securities have a weighted average rate of 5.27%. So pretty much 1, 1.25 points above where current market levels are, and those will very likely be calls, absent a change in rates.
There's another $669 million of bonds callable in Q4, but those are all at rates between 4% and 4.25%, so the likelihood of calls for those is much less unless rates were to move lower from the present levels.
John Matovina
On the commercial markets side, we made $77 million of new commercial mortgage loans in the fourth quarter at a yield of 5.59%. For the full year, $554 million were put up in new commercial mortgages at a weighted average yield of 5.73%.
And we continue to be active in the commercial mortgage area, although rates for new products are down -- or new originations are down in the low-5 to high-4 level but still very attractive relative to what we can get for securities, and we continue to make very high-quality mortgages at those yields. Of the $2.86 billion of commercial mortgages in the portfolio, 96% of those are performing in accordance with their terms, 0.2% are delinquent and the remainder of 3.8% are loans where we have some workout terms or we've determined the loans to be collateral-dependent in order to achieve recovery.
John Matovina
The dollar value of loans in workout is $113 million. And we've got total loss reserves on the commercial mortgage loan portfolio of $33 million, split between a specific loan loss allowance and a general loan loss allowance.
In the fourth quarter, those allowances were increased an aggregate of $7.2 million, split equally between the specific loans and the general loan loss allowance. And we do have some additional disclosure on our financial supplement, in the area where we historically disclosed a commercial mortgage loan information that was going to break down the portfolio by status.
John Matovina
In terms of other temporary impairment losses in the quarter, they were at a total of $16.3 million, of which $15.5 million were attributable to residential mortgage-backed securities, which reflects the ongoing evaluation of those securities based upon the number of data sources, and the newest data source would have been the updating of the PIMCO pricing, which, I think, pretty much everybody is aware of is used for purposes of determining the NAIC classes, which is then used or is important in the determination of risk-based capital. The other $800,000 was on a single corporate security that has been sold in the first quarter.
John Matovina
We don't have exposure to European sovereign debt, and less than 1% of our assets would be in Eurozone financial stocks, so very, very limited exposure to that aspect of what's happening in the world today. And following the comment about the additional disclosures on commercial mortgages, we've added some detail into our financial supplement that provides more detail of the breakdown of our securities by type.
John Matovina
Our GAAP net income for the quarter was $49.7 million. This is the first quarter in several where our FAS 133 adjustment is actually resulting in higher GAAP net income compared to operating income.
And as we've commented in the past, that FAS 133 number results on our index annuity business moves around quite a bit based upon the discount rate that's used to discount back the future index credits. And that's been a source of our GAAP net income volatility for quite some time.
John Matovina
Our RBC for year end was 346% compared to 339% a year ago and down a few ticks from where we were estimating RBC at the end of the third quarter. The increase for this year is benefiting from a reduction of our MEAF, which is mortgage experience adjustment factor, in the RBC calculation.
That factor looks at our mortgage loan loss experience relative to the industry over a 24-month period. Over the last several years, that factor has been climbing and reversed in 2011.
So it gave us some benefit there. We don't anticipate any material decline in RBC, so we really don't have any plans to -- we don't have any expectations that we need to raise additional capitals for its sales growth.
John Matovina
Should RBC begin to consistently trend upwards, we would consider utilizing our authority to repurchase our stock. Of course, we're only going to do that if the stock trades below or is trading below the book value, and that's the book value, excluding the AOCI or unrealized appreciation in the assets.
We do have the repurchase authority from our board, although based upon stock price, no immediate attention as to buying back shares.
John Matovina
The book value at December 31 was $16.09, excluding the accumulated other comprehensive income. That's up from $15.33 at September 30.
We have unrealized gains in the portfolio of some $1.5 billion, which takes the reported GAAP book value number up to $23.82. Our ROE on operating earnings was 14.8%.
And if you exclude the impact of our DAC unlocking in the third quarter, still a very healthy 13.4%.
John Matovina
And then finally, I know everybody's looking for comment on the new DAC standard and what that's going to do to 2012 results. We will be adopting that standard on a prospective basis, so no restatement of prior-year results.
Based upon the analysis we've done, if that standard had been adopted as of the beginning of this year, our deferred acquisition costs would have been reduced by about $9.8 million. The effect on pretax earnings would have been $9.5 billion because we would have had less amortization on an after-tax basis.
That's about $6 million or $0.09 to $0.10 per diluted share.
John Matovina
And with that, I'll turn the comments over -- the program over to Ron Grensteiner.
Ronald Grensteiner
Thank you, John. Good morning, everyone.
As Wendy reported, we had a record-breaking year with $5.1 billion in sales, a 9% increase over 2010, which was itself a record-breaking year at $4.6 billion. Our fourth quarter of 2011 was down a bit from the fourth quarter of 2010 at $1.37 billion.
Overall, a very, very satisfying year in sales.
Ronald Grensteiner
Driving factors behind our strong sales included the desire for principal protection and guaranteed income and, of course, the opportunity for more interest to index-linked strategies. Our average index credit for 2011 was 4.15%, pretty respectable, considering the economic environment we're in today.
American Equity's consistency in the market is a factor as we've been in the top 5 for index annuity sales for 47 of 51 quarters, and that's through the third quarter of 2011. I imagine we'll be 48 quarters once we see official 2011 numbers.
Ronald Grensteiner
Certainly, a major factor in our success is American Equity's people and our culture. When Dave Noble formed the company, he said we needed competitive products, rates and commissions, but the difference-maker was going to be the best customer service in the industry.
We have very dedicated people who deliver our great service. I'm very proud of them.
And it's real not -- it's not real complicated stuff either. It's issuing policies in 24 hours, paying withdrawal proceeds accurately and on time, and a big one, of course, is answering the phone with a real person.
You'd be surprised how much play we get from that, that one thing alone. From a time a call hits our switchboard, you'll be talking with a live person within one minute.
Ronald Grensteiner
We also exceeded our Gold Eagle goal for 2011, with 1,227 Gold Eagle producers. To refresh your memory, these are producers that send us at least $1 million in premium per calendar year.
Our Gold Eagle producers were responsible for 57% of our sales in 2011, and that's been a pretty consistent number year after year. 2012, as Wendy mentioned, is going to be an interesting year.
As I visit with producers, there are some out there that say they're having a difficult time selling in this low rate environment. As purchasers delay buying in an anticipation of an interest rate increase, other producers see it as an opportunity for our products today, especially as the baby boomers seek safe retirement products.
Ronald Grensteiner
Kirby Wood and I just visited the offices of 18 of our top marketing companies. Some of those folks were optimistic for 2012, and others felt that sales would be relatively flat for the year for them.
And as Wendy also mentioned, another factor is our European competitors. Some of them may have potential difficulties, and then there are some of our competitors that are notorious every year for their "in the market, out of the market" strategy.
So all those things boiled down will make for an interesting year.
Ronald Grensteiner
American Equity products are very strong when you compare them to our core competition. There are a few outliers where products are far and away above the core competition.
We think that these products are either mispriced or the companies are using riskier asset strategies. In any case, this is a realm that we have no interest in competing, especially in today's interest rate environment.
If we lose some Gold Eagle agents to these companies, we're going to do our level best to educate those producers and contrast our company and products to those other companies.
Ronald Grensteiner
We're also starting to hear some new indexing strategies, including proprietary indexes. This is particularly interesting given that the regulators are leery of these indexes to the point that the Iowa Insurance Department says that agents should be securities-licensed if they're going to talk about some of these unique indexes and proprietary indexes.
Ronald Grensteiner
We also understand from discussions with our marketing companies that some producer group sales and other companies haven't taken off as planned. Frankly, some pretty significant marketing companies that do business with us are not real happy about being excluded from the group, and hence, that's why we plan to be fiercely independent and not allow producer groups or proprietary products at American Equity.
We think our strategy is the right strategy for the long run. All of our producers and marketing companies have helped us be successful, and we don't plan to forget that.
Ronald Grensteiner
We have a couple of strategies for 2012 that are continuations from 2011. One is to weed out our nonproducing agents.
If they haven't written one application in the last 24 months, we'll do each other a favor and terminate their contract. They won't be bothered by our mail and e-mail, and we'll save some expenses on appointment fees and marketing dollars.
At year end, our agent count was 22,500, and that's down from an all-time high of over 50,000 agents in our earlier days.
Another goal is to focus on our 1,227 Gold Eagle members. We typically have several marketing initiatives, but this year, if it's not geared towards our Gold Eagle program, we're not going to do it. So our primary goal is to retain as many of our Gold Eagle members as possible, and our secondary goal is to retain as many of our Gold Eagles as possible. This past year, we retained 65% of our Gold Eagle members, which was an all-time high. Our strategy
Don't give them a reason to go elsewhere. We'll promote our consistency in the market, our clean assets, clean products, great service and, of course, the merits of being a Gold Eagle member, which include the marketing dollars and the American Equity stock options.
Another goal is to focus on our 1,227 Gold Eagle members. We typically have several marketing initiatives, but this year, if it's not geared towards our Gold Eagle program, we're not going to do it. So our primary goal is to retain as many of our Gold Eagle members as possible, and our secondary goal is to retain as many of our Gold Eagles as possible. This past year, we retained 65% of our Gold Eagle members, which was an all-time high. Our strategy
This is a pretty significant program for our typical Gold Eagle agent. If you look at our average Gold Eagle agent, they write about $2.4 million for us.
If you look at the Gold Eagle program, that agent will receive a little over $4,000 in marketing money and 1,050 stock options. An example of our focus on our Gold Eagle agents is that we're inviting only Gold Eagle members to our Sixth Annual Million Dollar Producer Forum in March.
In the past, anyone who could prove they could write at least $1 million in the past year of fixed annuities, they were invited. This year, it's invitation-only to our Gold Eagle members.
It's going to make for a smaller group. Last year we had over 800 attendees, but this year we expect about 500.
And our plan is that we want to strengthen our relationships with the Gold Eagle agents and earn a bigger share over their overall business and market share.
Another goal is to focus on our 1,227 Gold Eagle members. We typically have several marketing initiatives, but this year, if it's not geared towards our Gold Eagle program, we're not going to do it. So our primary goal is to retain as many of our Gold Eagle members as possible, and our secondary goal is to retain as many of our Gold Eagles as possible. This past year, we retained 65% of our Gold Eagle members, which was an all-time high. Our strategy
Finally, we continue to enjoy great success with our policyholder appreciation events. These are events we think -- these are events where we invite policyholders of our Gold Eagle agents to a luncheon.
We talk about our company philosophies. We talk about our financials.
We talk about fixed annuity basics, but most importantly, we give an opportunity to say thank you for entrusting us with their money. We have been holding these events since June of 2010.
So far, we've hosted 7,500 policyholders, 518 Gold Eagle agents, and we've been in 39 cities. And every time we hold an event, we receive phone calls, letters and e-mails from very appreciative policyholders and Gold Eagle producers.
Recently, we received an e-mail from a daughter of the policyholder who said her mother just wouldn't stop talking about the event she attended. So those things certainly make us feel very good.
Another goal is to focus on our 1,227 Gold Eagle members. We typically have several marketing initiatives, but this year, if it's not geared towards our Gold Eagle program, we're not going to do it. So our primary goal is to retain as many of our Gold Eagle members as possible, and our secondary goal is to retain as many of our Gold Eagles as possible. This past year, we retained 65% of our Gold Eagle members, which was an all-time high. Our strategy
We figure if we hosted 7,500 policyholders, probably all of those policyholders talked to 2 or 3 people about the event. So we think that we've had some pretty good exposure.
Over 20,000 people probably know about our event, and hopefully in a very positive light.
Another goal is to focus on our 1,227 Gold Eagle members. We typically have several marketing initiatives, but this year, if it's not geared towards our Gold Eagle program, we're not going to do it. So our primary goal is to retain as many of our Gold Eagle members as possible, and our secondary goal is to retain as many of our Gold Eagles as possible. This past year, we retained 65% of our Gold Eagle members, which was an all-time high. Our strategy
We have submitted our policyholder appreciation event for consideration for a Stevie Award. Now the Stevie Award is international recognition for excellence and customer service.
We are a finalist in the customer service category of innovation and customer service. Other finalists include Dubai First of Dubai, ING Direct, John Hancock Signature Services, Scottrade and Turkish Economy Bank.
So it is truly an international competition, and we're going to find out next Monday if we're going to bring home the golden Stevie. So that will be exciting.
You'll hear more about that, I'm sure, if we get the golden Stevie.
Another goal is to focus on our 1,227 Gold Eagle members. We typically have several marketing initiatives, but this year, if it's not geared towards our Gold Eagle program, we're not going to do it. So our primary goal is to retain as many of our Gold Eagle members as possible, and our secondary goal is to retain as many of our Gold Eagles as possible. This past year, we retained 65% of our Gold Eagle members, which was an all-time high. Our strategy
So with that, thank you, and I'll turn the call over to the operator.
Operator
[Operator Instructions] Your first question comes from the line of Randy Binner, FBR.
Randy Binner
Just on the RBC, I guess I'm wanting to see if you could quantify how much the MEAF benefit was in the year. And just kind of going towards John's comments about not anticipating a change in the RBC, I mean, if there was no MEAF and sales are kind of flat, would that be consistent with RBC kind of staying around this 340s, high 340 level?
John Matovina
If there were no what, Randy? No sales growth or...
Randy Binner
If sales were flat. I mean, the other part of my question is, I mean, Wendy's mentioned that she's cautious on the outlook for index annuity sales.
So should we read that as you're kind of thinking they could be flat this year? I'm kind of looking for a starting point on that, too.
John Matovina
Let me go the -- if we were to put the -- if the MEAF wouldn't have come down, the RBC would have been at 327% or 328%. So that's the impact.
And of course, we were at a fairly high level, so in effect, reversing what we gave up and MEAF over the last couple of years as it escalated from a low level to the level it got to at the end of last year. So I mean, that being said, we absorbed $5 billion of new sales with only a 12 basis point decline in the RBC minus the effect of the MEAF.
And that's a result of generating significant statutory earnings from a very large base of assets, as well as -- I mean, part of those earnings are being generated from our commission program that we've had in place now for several years, where the upfront commission is stretched out over a couple of payments, and it helps build our statutory capital. So at similar levels, RBC would not decline to levels that get down to that 300% and force us to start, or cause us to start thinking about generating additional capital.
Randy Binner
Yes, I mean, I guess is the way to think of it simplistically that if you did $5.1 billion or $5 billion of sales again this year -- which is a starting point because every year kind of started 0, and we figured it out. If it wasn't for the MEAF, I guess the RBC would have ended more like 325%.
So should I think of kind of a flat sales year is eating about 20 percentage points of RBC? I mean, is there any other moving parts that would change that kind of simplistic view?
Wendy Waugaman
Randy, I think if sales were flat, you would see our RBC remains either flat or possibly go up. And that's because we've added significant additional assets to our invested assets in 2011.
We have an even greater capacity than we've had in the past to support new sales with our capital base. So flat or declining sales should be a positive for our RBC, and it would only be if we started to see significant increases over that $5 billion that we'd change our opinion on that.
Randy Binner
Okay. That was I was getting into.
And then I guess as far as, you seem very comfortable and successful with an A- rating from A.M. Best, so to the extent that, I mean, the RBC moved -- I mean, what's your target RBC?
Is it really 300%? And in the context of the buyback comments, I mean, would you target it down to 300% if you thought about buybacks, or would you want to keep more of a buffer relative to 300% on the RBC?
Wendy Waugaman
Well, first of all, we're not really satisfied with an A-excellent from A.M. Best.
Certainly, we've been very competitive with that rating, but we do think we're entitled to a higher rating and, someday, we'll get it. But to get to your real question.
300% is the minimum for our A- rating. We see that as the target that we're going to measure against, and we're comfortable as long as the RBC ratio is above that.
We've had RBC result in the mid-300%. We think that is a very comfortable place to be.
If we started seeing RBC creep up consistently over that 350% level, that would be an indication to us that we should consider a buyback.
Randy Binner
That's perfect. And just one more on capital, if I could.
Could you disclose what the ending cash balance was at the holding company at the end of the year?
John Matovina
About $9 million, $9 million or $10 million.
Randy Binner
And so thinking ahead, I would think you'd want to keep that -- usually just do the dividend at the end of the year, I think, if I might, John, so I wouldn't want to plan, probably, on a higher buffer than that by kind of looking at the end of '12?
John Matovina
What do you mean by higher buffer?
Randy Binner
Well, I mean, would I plan on you keeping more than $9 million? I'm trying to get to what I would expect for a dividend up to the insurance company -- holding company.
John Matovina
Our forecast do not -- we do not believe we'll need any dividend out of the insurance company to meet the holding company cash obligations for the upcoming year. We haven't taken one in several years, and even in the forecasting we did last year, when we thought that all of the 5.25% convertible debt that was puttable last December might be put against us, we were looking at $20 million at the most as a dividend.
So it's very unlikely we would need a dividend from the insurance company this year. And that's also kind of a function of the growing in asset base.
One of our principal sources of cash to the holding company, our investment management fees, which are generated by pursuant to a contractual arrangement, that's got Insurance Department approval and all that. And as the level of the assets grows at the insurance company level, the level of fees increases to the holding company.
Randy Binner
Okay. One more if I could, just to clarify that.
So with those fees, what would you see the balance at the holdco going to by the end of the year?
John Matovina
I think it's relatively flat. I've got a number someplace, but I don't have it in here with me.
Operator
Your next question comes from the line of Erik Bass, JPMorgan.
Erik Bass
Just had 2 questions. I guess first, if you could just touch on your view on the magnitude of the fire sale benefit for sales in the fourth quarter given the rate changes you made, and maybe provide an update on pending policy counts so far in 2012.
And then the second thing, if you could talk a little bit about what other levers you might have to manage interest rate risk outside of just the actions you can take on the crediting rates? I guess for instance, would it be feasible to reduce commissions or contract bonus levels, or take other actions to reduce what your required spread would be?
Ronald Grensteiner
Well, this is Ron. The fourth quarter, we did have a bit of a surge due to a fire sale.
Just we adjusted some of our crediting rates. When we do that, of course, the pending count always gets inflated.
When you look at -- without the fire sale mentality, I think it's a better barometer of our sales. When I look at last year, pending was in the low 3,000s for most of the year.
And today, pending is in the high 2,000s, closer to 3,000. It bounces between 2,700 and 3,000.
And then I look at what month it is, it's February. And traditionally, January and February have been a bit soft.
And so when we get to March and April and May, those are historically bigger months as producers get into asset -- or excuse me, tax time with their policyholders and those types of things.
John Matovina
On the second question about what other things we have available to deal with the rate environment, you've got it right, adjustment of policy terms. Probably, most likely, premium bonuses would be the thing that would be adjusted, and we've not discussed it internally to reach a collective decision.
But I know what we've seen in the marketplace in response to this environment is the level the premium bonuses has come down by a number of our competitors. We've actually reduced one of ours as well, and that certainly would be a very logical move in the event that rates move lower from here, and we need to make further adjustments to make sure we achieve desired spreads.
Operator
Your next question comes from the line of Jack Sherck from SunTrust.
Jack Sherck
I'm sorry, I missed it. What was the number of Gold Eagle producers in the quarter?
John Matovina
We measure it for the year, and we had 1,227 Gold Eagle producers.
Jack Sherck
Okay. And then you mentioned having 22,500 total producers out there, and then also starting a weed-out program.
Is that new? And then how much could that result in, in terms of shaving that producer count, and then what kind of cost that will sort of result?
Ronald Grensteiner
We have been weeding out our nonproducing agents for a while now. When I talk about 22,500, that would actually be contracted agents.
But out of that 22,500, there's probably about 10,000 or 11,000 that wrote at least one piece of business last year. And that number is kind of always in flux because we're bringing on new agents every month, and we're losing some out the back end every month because they're not producing.
We will continue to monitor that very closely because it does cost money to have nonproductive agents on the books. We have to send them letters and e-mails regarding upcoming rate changes and marketing material, plus we pay their insurance -- their state appointment fees.
To have an agent on the books, it probably costs us somewhere between $200 and $300 a year just to have them on the books. So that is certainly a way that we can be more efficient, is by taking those agents off the books if they're not going to write at least one application.
Jack Sherck
And then is there any thoughts here on the tougher sales environment in 2012, about maybe stepping up efforts there or the number of policy quota the agents have to write?
Ronald Grensteiner
I'm sorry. I couldn't really hear your question.
Jack Sherck
Just with the tougher sales environment in 2012, is there any thoughts of maybe stepping up the policy count, or the number of policies those agents have to write to stay on the books?
Ronald Grensteiner
No. When you're an independent agent channel, they certainly have no obligation to write for you.
So if they have expressed an interest in us by sending us at least one application, we think that that's a good lead. Again, looking at the numbers, we had 10,000 to 11,000 agents write at least one application.
And then we had 1,227 Gold Eagle producers. So that's a big gap between those 2 numbers where we can try and get those other 8,000-plus agents to write more than one application.
Operator
Your next question comes from the line of Ed Shields, Sandler O'Neill.
Edward Shields
Real quick question on kind of the competitive environment and what's going on in the index annuity space. Wendy, you've mentioned The Hartford and the Wirehouse, but I know there's another competitor who entered the independent agency channel in the fourth quarter.
And I'm just wondering what you're seeing with that in the independent agency channel.
Wendy Waugaman
Not sure who you're referring to exactly.
Edward Shields
That will be Genworth.
Wendy Waugaman
Gosh, we've got a sales report, a preliminary sales report for the fourth quarter. Let's see what Genworth did.
John Matovina
Let's see. When I looked at Genworth's here, and I don't even see Genworth on the report.
Edward Shields
Interesting. Okay.
Well, that's fair enough. I know, Ron, you had also mentioned that there's some products out there that were a little uncompetitive either on pricing or on, perhaps, investment strategies.
Can you give any additional color there on what those policies or those index annuities products are doing that's so out of line?
Ronald Grensteiner
Yes. When you look at all the products that are out there, the insurance companies will take different parts of the products and manipulate them to try and capture the attention of the producers out there.
Some companies will have a higher-than-average premium bonus. Others will have a higher-than-average lifetime income payout factor.
And there's a couple of companies that probably have higher than average of both of those. And so what we look at is how were they making those calculations.
Are they calculating the fees for some of those benefits on the income account value? Or are they looking at the contract value?
And then we look at the company. What are they investing in?
Are they taking more risk than the typical insurance company to try to meet the rate of return that you need on your investments to satisfy those guarantees that they're making? So when we see companies that are far and above everybody else, when we talk to our producers, we say, Are they that much better than everybody else?
Or do you think that they're taking some chances that an insurance company maybe shouldn't? And we talk about the fact that, in this business, we have policyholder obligations that we have to meet for 10, 15, 20 years down the road, and you need to know what you're doing if you intend to meet those obligations.
Edward Shields
Okay. Just one quick clarification there on the premium bonuses that are above the kind of the average that you're seeing.
Those aren't premium bonuses that are being increased. They're just staying flat and not being changed or lowered given the interest rate environment?
Ronald Grensteiner
No, the premium bonuses aren't being increased. They're staying flat.
And you combine a flat premium bonus with, perhaps, another bonus on top of the account value to determine guaranteed income. And then maybe add onto that a higher-than-average interest rate to compute that income account value.
That's when you start to get over the line as far as how much you're paying for those benefits.
Edward Shields
Okay, got it. Great.
Second question on the investment side. The new commercial mortgage loan origination in the quarter was down a little bit.
What's going on, what are you seeing in the origination market in terms of competition for the loans or is -- how much pressure is on underwriting and the effective interest rates on those loans as well? Any color there would be helpful.
John Matovina
We'll, I'd say, comment, our lower production in the fourth quarter would have been because we were holding out on rates and competition was moving down. We did make one adjustment and that really didn't get it done, and so we dropped our rates from the 560 level to the 525 or 535 level.
Our team seemed to be happy about that, but it didn't translate into much additional business. And we reconvened earlier this year and made the call to take our rates down to that 5% level.
That, from the feedback we get, it still puts us above a number of the other competitors. And I think it's an insurance base there -- what I'm hearing is there's lots of competition out there for commercial mortgages these days because of the yield available relative to what you can get on securities.
We have not adjusted our underwriting standards one bit from where they've been throughout the entire time and would not do so. So we, just like our products, we stick to our requirements, and we'll take what our yield gets us or what our turns get us.
And we have seen some pickup in activity now that we've got our rates down at that 5% level in this quarter.
Edward Shields
Okay. So competition is pretty much the usual suspects?
There's nobody new?
John Matovina
I'm not aware of anybody new, but my information, Ed, is more anecdotal from this team talking about it. But in the couple of meetings we've had to review and approve applications in the last couple of weeks, nobody said anything about somebody else is sitting out there with this rate or something like that, that's new to the space.
Operator
Your next question comes from the line of Bill Dezellem, Tieton Capital Management.
William Dezellem
Would you please discuss you view of the sustainability of the operating earnings results that you reported this quarter? And I pose the question because last year you, for many other quarters, just didn't -- each quarter, there was something special that happened that you weren't quite able to get the ongoing traction, but it really seems like this quarter it all came together.
Would you please give some perspective and, again, talk on sustainability, please?
Wendy Waugaman
Sure, Bill. Each quarter in this last year was really a very strong quarter.
The third quarter was a record quarter for us, and so there've been various factors we've talked about that have affected spreads, but honestly, we felt good about the operating results of each quarter, and particularly good about the fourth quarter. And I think your question in terms of outlook comes down to spread management, which is the key driver of our operating earnings.
And we do feel reasonably confident that we can continue to manage to our spread target for the reasons we talked about. That our ability to continue to adjust rates, we have a careful eye on that.
Our asset base has increased as a result of the sales growth. Even if sales in 2012 are flat or down, the majority of the earnings are being driven by the existing policyholder base.
And as long as we continue to grow assets even at a lower sales volume potentially, we would expect to see continued growth in those earnings. And so barring unforeseen challenges, we would expect to continue to see our operating earnings move up.
John Matovina
One addition, when you look at the numbers, the first quarter of last year had a high number because we did have a $0.04 onetime item in there. So going from first to second quarter, there was a slight decline, but when you remove that onetime item, there was an increase of a couple of pennies in operating.
And kind of the only headwind or possible negative I see is the fact that we might get back, or we're going to get back into a period of higher cash balances if the calls continue. And everything that's been eligible for call in the first quarter has been called.
So that may put a little headwind against the momentum, but it's not going to set us backwards in terms of earnings.
Operator
Your final question comes from the line of Paul Sarran, Evercore Partners.
Paul Sarran
I just wanted to follow up on your comments on share buybacks and get a little bit of clarification because I think you said that you'd be interested in buying back shares below book value, and then I think you also said at the current share price, you don't have any immediate intention to buy back stock. And I know that capital level and sales strain is one factor, but can you just comment on those comments about buybacks versus the stock price?
Wendy Waugaman
I think our attitude about the buyback is, as you articulated, our #1 usage for our capital is to support sales growth. However, as we commented a few minutes ago, there is a scenario where our RBC ratio may tick upwards over 350%, and that would be potentially a buyback scenario.
It's only a scenario, however, if our stock continues to trade below book and we do not see the current price as the price at which would prevent us from buying back shares. The only thing that, at the moment, prevents us from buying back shares is our desire to make sure we're adequately capitalized to support sales growth.
And so 2 triggers to a buyback. One is increasing RBC, and other is continued market price below book value of our stock.
John Matovina
Paul, I think I confused my words when I spoke earlier, and I apologize for that.
Paul Sarran
Okay. And then just one follow-up.
Knowing that your stock has traded below book value for a while now, and then also that capital relief in the form of coinsurances has been pretty readily available, have you looked at using coinsurance to manage the capital strain of new sales and free up some capital that you could use towards share buybacks?
Wendy Waugaman
We've always said that in the current market environment, it's not attractive to issue stock. It's not attractive to raise new debt.
And so reinsurance, including both financial surplus-type reinsurance as well as coinsurance, are the better alternatives for supporting our capital. We view reinsurance as a tool to be used if we're seeing significant sales growth that might cause our RBC ratio to decline.
We really haven't considered it as a way to boost our RBC ratio up, and that's because we think over the long term, maintaining our assets, maintaining as much of our assets as we're able to with our capital base, is going to be the more profitable scenario because we can continue to earn our spread on those assets over the long haul.
Operator
I would now like to turn the call over to Julie for closing 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 for your participation in today's conference. This concludes the presentation.
You may now disconnect. Have a good day.