Aug 2, 2013
Executives
Julie L. LaFollette – Director of Investor Relations John M.
Matovina – President and Chief Executive Officer Ted M. Johnson – Chief Financial Officer and Treasurer Ronald J.
Grensteiner – President
Analysts
Mark Finkelstein – Evercore Partners, Inc. Randy Binner – FBR Capital Markets Mark Hughes – SunTrust Robinson Humphrey Steven Schwartz – Raymond James & Associates Edward Shields – Sandler O’Neill Mark Hughes – SunTrust Robinson Humphrey
Operator
Welcome to the American Equity Investment Life Holding Company's Second Quarter 2013, Conference Call. At this time for opening remarks and introductions, I would like to turn the call over to Ms.
Julie LaFollette, Director of Investor Relations. Please proceed, ma'am.
Julie L. LaFollette
Good morning and welcome to American Equity Investment Life Holding Company’s conference call to discuss second quarter 2013 earnings. Our earnings release and financial supplement can be found on our website at www.american-equity.com.
Presenting on today’s call are John Matovina, Chief Executive Officer, Ted Johnson, Chief Financial Officer and Ron Grensteiner, President of the Life Company. Some of the comments made during this call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act.
There are number of risks and uncertainties that could cause actual results to differ materially from those expressed or implied. Factors that could cause the actual results to differ materially are discussed in detail in our most recent filings with the SEC.
An audio replay will be available on our website shortly after today’s call. It is now my pleasure to introduce John Matovina.
John M. Matovina
Thank you, Julie and good morning everyone. Thank you for joining us this morning.
As we reported yesterday evening operating earnings for the second quarter excluding the $5.5 million charge for the guarantee fund assessments related to the insolvency of the Executive Life of New York came in at $35.8 million or $0.51 per diluted share and that compares to $27.4 million or $0.43 per share a year ago in the second quarter. We absorbed in the second quarter earnings a 9.5% increase in the diluted share count, which translated into about $0.05 a share in earnings and that increased dilution is coming from the convertible notes or primarily from the convertible notes which we’ll hear a little bit more about later in the call.
Relative to first quarter 2013 operating income of $33.5 million the second quarter was up 6.8% and that includes some incremental investment spread offset by some higher DAC amortization and then, a slightly higher effective tax rate and I think as you probably noticed our GAAP net income was extraordinarily large in the second quarter due to the derivative accounting for our indexed annuity business and that translated into a large increase with the large increase in book value per share and Ted’s remarks will include some commentary on the factors that gave rise to the large net income number. Our results for the quarter continue to be held back by the low interest rate environment although perhaps maybe we’re starting to emerge from that environment with the activities in interest rates that have occurred since the middle of June but the high cash balances and excess short-term investments did persist in the quarter from a previous calls of government agency securities.
But as you'll hear in Ted’s remarks, we made further progress this quarter in reducing that excess balance and the average balance outstanding in the second quarter was slightly less than the first quarter. In our remarks 90 days ago or so, when we were talking about first quarter, we were cautious about our expectations for the second quarter because we had $678 million of government agency securities that have been called in April but we made much more progress in reducing that excess cash balance during second quarter than we had expected 90 days ago and so we’re now expecting that we will be in a fully invested position by the end of this quarter and I think as you might hear from Ted, we are actually pretty close already to being fully invested.
Sales for the quarter were $1.1 billion and they met the expectations that we outlined in last quarter’s call of surpassing a $1 billion. Those sales results contributed to a 4% increase in our assets under management and that brings us to a 14% increase over the last 12 months in the assets under management.
So even though we’re not on page for the $5 billion levels of sales that we achieved in 2011 at these current level of sales, which are roughly in the $4 billion range, we’re continuing to grow the balance sheet in a double-digit fashion. And as usual, Ron's remarks will include commentary about sales results in the competitive environment.
So with those opening remarks, I will turn mike over to Ted for comments on the earnings.
Ted M. Johnson
Thank you, John. Investment spread for the second quarter was 2.7% and total invested assets at June 30 were $29.1 billion, $27.9 billion on an amortized cost basis.
Invested assets will grow by an additional $105 million as we invest the excess cash balance held at the end of June. The spread result of 2.7% was 2 basis points more than the previous quarter spread of 2.68%.
The average cash and other short-term investment balance during the second quarter was $1.7 billion compared to $1.8 billion during the first quarter and $2.7 billion during the fourth quarter of 2012. The yield on these instruments in the second quarter was 47 basis points compared to 33 basis points in the first quarter of 2013 and the fourth quarter of 2012 partially offsetting the cost of liquidity was 4.5 basis points from prepayment income on commercial real estate mortgages and consent fees on bonds.
In addition we had six basis points of benefit from over hedging in the second quarter. In comparison, we had 7.5 basis points of prepayment income and 3 basis points of benefit from over hedging in the previous quarter.
The cost of money declined to 2.24% in the second quarter from 2.33% in the first quarter. This decline reflects management’s actions to maintain spreads by adjusting rates to policyholders.
We will make further reductions in policyholder rates as necessary to with store investment spread to the 3% target. We have approximately 60 basis points of room to reduce fixed rates and rates on Indexed annuity policies before minimum guarantees would cause spread compression.
You can see the disclosure of this in the financial supplement on pages 11 and 12. During the second quarter, we purchased $2.6 billion of new fixed income securities at an average yield of 3.48%.
And we funded $147 million of new commercial mortgage loans at an average yield of 4.11%, $1.5 billion of the security purchases were predominantly investment grade corporate bonds with an average yield of 3.36%. We also purchased $485 million of commercial mortgage backed securities with an average yield of 3.87% and $330 million of residential mortgage backed securities with an average yield of 3.41%.
During the second quarter $678 million of government agency securities with an weighted average yield of 4.08% were called. At current rates and market conditions, our call exposure for the remainder of 2013 is $500 million of government agency securities that are callable in October.
These securities were purchased at a premium to par as substitutes for short term cash investments with yields of 0.72% to 0.77% to their initial call dates in July 2013. With the increases in interest rates, since the middle of June, these securities were not called in July as was formally expected and now yield 3.75%.
However they are callable quarterly and a modest decline in interest rates from current levels could result in the calls being exercised on their next call date this coming October. We also own $660 million of 15 to 20 year government agency securities with coupons and book yields ranging from 2.96% to 4.28%, $36 million of these securities become callable in late September, $250 million become callable in late December, $324 million become callable during the first quarter of 2014 and $50 million become callable during the second quarter of 2014.
However based upon current interest rates we do not expect these securities to be callable. Operating cost and expenses were $24.9 million for the second quarter compared to $19.5 million in the first quarter.
Operating cost and expenses for the second quarter includes $8.5 million of expense for guaranty fund assessments related to the insolvency of Executive Life of New York and a credit of $3.2 million for the Stephens lawsuit. The $3.2 million credit for the Stephens lawsuit represents undistributed settlement awards due to beneficiaries that could not be located or do not come forward to claim such awards during the agreed upon time period which expired during the second quarter.
That puts normalized operating expenses for the quarter at $19.6 million or roughly the same amount as first quarter and slightly more than the second quarter of 2012. Book value per share excluding accumulated other comprehensive income of $18.66 is up a $1.82 from the March 31 book value of $16.84.
The large increase for the second quarter and book value reflects the substantial amount of reported net income for the quarter associated with indexed annuity derivatives and embedded derivatives. The indexed annuity embedded derivative liability measurement is significantly impacted by the level of interest rates which increased at June 30 causing this liability to decrease in value.
This financial accounting volatility which is unrelated to our core operations and management of our indexed annuity business highlights why we exclude this activity from our operating earnings each period. As disclosed in our quarterly financial supplement through the years, our book value per share amount are calculated using total stockholders equity excluding accumulated other comprehensive income and the total number of shares – total shares of common shares outstanding as of the reporting date.
Unlike diluted EPS there is not an established accounting protocol for determining diluted book value per share and we have not determined the potential dilution to our reported book value per share from convertible securities and stock options. With the recent increase in our stock price the potential reduction in book value per share from conversions of convertible securities could be meaningful.
Our RBC at June 30 was estimated at 324 slightly down from 330 at the end of last quarter and 332 at the end of 2012. We sent out a notice of mandatory redemption for our 5.25 contingent convertible senior notes due in 2024 in late March, 25.8 million principal amount or 91% exercise their conversion rates prior to the April 2013 mandatory redemption date.
The holders of these notes received the principal amount in cash and 216,729 shares of American Equity common stock for the conversion premium. The 2.45 million remainder of the convertible notes was redeemed for cash of $2.5 million which includes accrued interest through the redemption date of 0.05 million.
We used holding company cash and draw on our line of credit to fund our cash obligations in connection with the conversions, redemptions of these notes. As previously announced, subsequent to the end of the quarter, we issued 400 million of 6.625% senior notes due in 2021.
We used $15 million of the net proceeds from the notes issuance to repay the entire amount drawn on our bank line of credit facility and intend to use the remaining net proceeds to pay the cash consideration component of the exchange offers we intend to make in the near future to the holders of our 5.25 convertible notes due in 2029 and our 3.5% convertible notes due in 2015 depending on market conditions or other factors. The terms of these exchange offers including the mix of cash and stock consideration to be offered to the noteholders are still being finalized and will be available at the time the exchange offers are made.
During the second quarter, Standard & Poor's rating services affirmed its BBB+ insurer financial strength rating on American Equity Investment Life Insurance company and its BB+ counterparty credit rating for the holding company and revise the outlook on these ratings to positive from stable. In the rating commentary S&P noted that the positive outlook reflects our improving capitalization as measured by S&P's capital model.
With that I’ll turn the call over to Ron to talk about sales and production.
Ronald J. Grensteiner
Thank you, Ted. Good morning everyone.
Before I talk about sales and marketing, I would like to speak about the real value proposition of fixed indexed annuities to start. You’ve heard us speak repeatedly about our optimism for growth in our market especially as the baby boomers begin to retire.
On our last year, 2012 fixed indexed annuity sales were $34.2 billion which was the record year, but in the big picture just a drop in the bucket of the financial market universe. We continue to grow market share for industry by promoting and educating the public and retirement planners about the merits of our products.
To do this we need to talk about basics of principal protection, guaranteed interest, guaranteed income and so forth. We have to stay focused on the fact that we are a safe money product first and foremost.
Our policyholders didn’t lose a penny due to the financial crisis in 2008, 2009. It's also good though to talk about some nice index credits.
Today with the stock market at all-time highs, our policyholders are benefiting from this market environment as well. In the second quarter, the average index credit was 6.05% and the maximum index credit in the second quarter was 18.95%, I got 15% on my personal annuity.
In the first six months of this year 81% of our policyholders got greater than 3%, 66 of them got greater than 4%, 51% of our policyholders got greater than 5% and 35% of them got greater than 6, 5.19% is the average index credit for the first six months of this year. So it’s not too bad for a safe money vehicle.
As far as sales go, the second quarter John reported we had $1.135 billion in sales compared to $930 million in the first quarter. That is a 22% increase from the first quarter.
Our sales in the first six months of this year are $2.1 billion, compared to $1.9 billion for the first six months of last year that is a 10.5% increase. We’re really focused on growing the company this year and to we do so we’ve introduced several new initiatives, we launched a sales promotion in April 1, we raised our minimum premium limits in April, we introduce new riders in May, we introduced another version of our current income rider in July and we also announced a rate increase for new premium that’s effective today.
We think we’re getting some decent traction from our new riders. Now one is a death benefit rider where the beneficiary can get the greater of the annuity contract value of 4%.
However to get the 4%, the beneficiary needs to take payments over a five-year period, otherwise it will be discounted if taken as a lumpsum. Another one is the well-being rider in this situation the policyholder cannot perform 2 out of 6 activities of daily living.
We will double the income amount for a maximum of five years. And finally, we also introduced a 7% version of our standard lifetime income benefit rider, this version now has a maximum roll up period of 10 years as opposed to the 20 years on our other products.
Our pending count peaked just under 4000 in early June, this was in part due to an adjustment of our lifetime income benefit rider interest rate increase, since then it has bounced around between 3100 and 3300. As of today, it is 3108.
As comparison, August 1 of 2012, it was 2834. As far as competition goes it's been a bit of a mix bag in the second quarter some of our competition made adjustments to reduce benefits, others added features are increased benefits but the bigger trend seems to be that more want business than those that don't.
So at the end of the day our philosophy and as it has been from day one is we are going to be competitive on our rates and features but our main goal is to deliver the best service in the businesses is our real difference maker. As of June 30 our agent count was at 25,300 this is the first time it’s been about 25,000 since October of 2011, we contacted 1548 agents in the first quarter and 1880 in the second quarter as comparison into second quarter last year we contacted 1407.
Our Gold Eagle account through June of those that actually qualified and just to refresh your memory our Gold Eagle agent is that producer that writes at least a $1 million in annualized premium with us. Through June we had 461 that had already qualified, we have another 529 on track for a total of 990, our 2012 totals at this time was 893 which is a 10.8% increase of our Gold Eagle members during the same time last year and this is just the confirmation that our year-over-year production and our Gold Eagle count has a direct correlation.
We just finished another convention qualification period at the end of June, our qualification period runs from July 1 through June 30 and while our Gold Eagle agents are important, our convention qualifiers are extra exceptional producers because they need to write at least $3 million during this time period. We actually had fewer qualifiers this year 229 compared to 266 the previous year but our average premium per qualifier went up, it went up from $4.9 million to $5.4 million.
So these are certainly some producers for us and while the convention destination may influence our numbers a bit from year-to-year I think this is a good indicator that a certain number of producers who really understand our core value as will produce for us regardless of our destination. Finally our policyholder appreciation events continue we’ve had a total of 63 events with over 13,000 people in attendance so far this year we had 10 different events and we’re averaging 221 people per event.
Next week, we’re in Detroit where we have 300 in attendance and in Pittsburgh where we have 200 people in attendance. We went to Pittsburgh back in 2010 when only we had 60 the first time we were there, so I guess our message and the success of this fine appreciation events is continuing to catch on and another good reason why we’re going to continue to do them.
And so with that that concludes my report. I'm going to turn it back over to John.
John M. Matovina
Thank you, Ron and Ted. Just to wrap up here kind of look at where we think see things going outlook for the balance of the year and into 2014 with sales in the first half of the year over $2.1 billion and good momentum heading into the third quarter, I think that positions us well for a $4 billion sales year.
However as we’ve commented on many occasions in the past, we’re going to continue to pursue sales and market share growth but not at the expense of acceptable profitability and we will remain disciplined in our approach to spread management and the product pricing. On spread management, as I said earlier that cash is pretty much now behind this and with the $500 million of securities resetting from a three quarters of percent rate to 375 rate, we are almost in a fully invested position these days.
We still got some work to do on renewal rate adjustments to get us back up to that 3% spread and those will get a lot of attention in this third quarter and we remain confident that we've got the flexibility capabilities to get that spread back up to the target. In terms of the balance sheet and Ted made some comments about the senior note offering and the fact is that offering together with the potential retirements of the convertible debts assuming all the holders will end up accepting our exchange offers significantly improves our capital structure by extending the debt maturities or refinancing obligations of those convertible note issues that we were facing in 2014 and 2015 and then eliminating any potential future dilution from those securities from a higher stock price.
Now we intend to make those exchange offers to the convertible note holders in the near future depending on market conditions and other factors, while the terms of those offers have not been confirmed yet, we expect them to conclude – include a combination of cash and shares of our common stock that the two convertible note issues have a parity value or an if-converted value of approximately $509 million, that was based upon an $18 share price and each $0.10 per share adds about another $2.8 million to parity value. In order to be successful those offers are going to need to include a premium to that parity value as an inducement for the holders to accept the exchange offer.
We’ve got about $400 million of cash available for the exchange offers, so any value that would need to be paid above that is going to be paid in shares of our common stock which would not be reflected in our June 30 book value per share amount. As the 400 million does include the net cash we anticipate receiving from early termination of the call spread on our common stock that is related to the 3.5% convertible note issues.
So we will be dealing with the warrants in that call spread which represents some potential dilution. At the same time, we extinguish the convertible debt issues.
The results of second quarter and the past several quarters confirm our commitment to continue to grow American Equity. Our operating income adjusted for that guaranty fund assessment was up 19% over the year ago quarter and has increased sequentially for each of the last three quarters.
As I said earlier, our assets under management are up 14% in the last 12 months. We delivered that growth while conservatively managing our risk and financial profile, sustaining a double-digit operating return on equity and maintaining a cushion to our targeted RBC ratio.
So in our view American Equity is very well positioned to capitalize on the growing demand for guarantee retirement savings and income products and we expect our invested assets and earnings to continue to grow in the periods ahead. So with that, that concludes our prepared remarks and we will turn the call back over to the operator to facilitate Q&A.
Operator
Thank you. (Operator Instructions) Please standby for your first question.
This comes from the line of Mark Finkelstein of Evercore. Please go ahead, sir.
Mark Finkelstein – Evercore Partners, Inc.
The first question I want to go is, just thinking about the rise in rates and what this means for earnings versus the attractiveness of the product and the need to constantly thinking about participation rates or cap rates? I’m trying to really understand how much of the rise in rates should we be thinking about as earnings versus sales in terms of adjusting the product offering?
John M. Matovina
Yeah, rise rate is one-half of evaluation Mark. I mean we’re going to be dealing with spread.
So as one aspect of higher rates would be, we don't have to reduce crediting rates as much or perhaps don't have to reduce them as much to get back to the 3% spread. In general rising rates, I think would probably be ahead of crediting rate adjustments, once we got back to the 3% target.
But that’s several quarters off into the future.
Mark Finkelstein – Evercore Partners, Inc.
Okay.
John M. Matovina
And actually at the current rates, we’re still below portfolio yield. So that means we’re still kind of facing a headwind in terms of renewal rates because product pricing typically just assumes a level interest rates scenario and that the investment income is done at the same rate as was assume that the time the policy was issued.
So and till the rate environment to say, moves back up to, let’s call at the 5% level. We’re still investing new and investment income at rates below the portfolio rate, and actually at rates below where number of the policies were issued at.
Mark Finkelstein – Evercore Partners, Inc.
Okay. I was actually intrigued by one of the comments that was made by Ron, which is I guess, the new rider you’re offering that sounds to me a little bit like almost a long-term care rider, where you're talking about two out of six ADLs?
Can you just talk about this a little bit and is it trying to I guess attract a different buyer of the annuity?
John M. Matovina
Well, not really. I guess the purpose of that wellbeing rider is to in a sales standpoint offer some additional peace of mind for the consumer that if they can’t perform two out of six ADLs that they can’t get additional liquidity from their annuity.
that the stop in it though is that we're going to do that only for a maximum period of five years. So it's a sales approach to help agents and of course obviously help the consumer with some peace of mind that if they do end up in that situation, there is additional liquidity.
Mark Finkelstein – Evercore Partners, Inc.
Does this product exist in the market today?
John M. Matovina
Yes.
Mark Finkelstein – Evercore Partners, Inc.
It does, okay. All right, thank you.
Operator
Thank you. Next question is from the line of Randy Binner of FBR Capital Markets.
Please go ahead.
Randy Binner – FBR Capital Markets
Good morning. Thank you.
So I want to try and ask some questions around these potential convert offerings. And I guess the first question would be, we can track kind of where the converts’ trade in the market.
But do you have a sense of what kind of premium you would offer? Is it like 5% something that will be good from an assumption perspective?
John M. Matovina
Randy, we can’t really talk about that. The lawyers counsel us on the pre-offer communications and all that.
So I know, in your case and other cases, you guys have got convertible desk and all that and they could probably give you some insight into that. But we shouldn't be talking about that that level of detail on this call.
I’m sorry, we can’t. But I think we’d be better off not to.
Randy Binner – FBR Capital Markets
How about I'll try this, do you have any sense on timing of when you might put the tenders out and if you try to do both issues at once or one at a time?
John M. Matovina
Yeah, same kind of response.
Randy Binner – FBR Capital Markets
All right, all right…
John M. Matovina
I drafted prepared remarks to give you as much as I thought we could without putting ourselves in a position where we couldn’t start offers as promptly as possible or whatever.
Randy Binner – FBR Capital Markets
I got you, no problem. So I guess and jumping over to sales, just a couple of quick ones for Ron.
One, can you give us any color on pending counts; and two, any color you can give us on kind of the nature of the private equity kind of bad competition? $1.1 billion of sales was actually quite good relative to our expectation, given what we were hearing about SEC ban and AFFINE out there.
So we'd be curious to see how you're holding up so well against that very aggressive competition?
Ronald J. Grensteiner
Well, they are still aggressive, that's for sure. I think from our standpoint, we're holding up quite well because of those relationships that we build over the years.
I think we get credit for our consistency in the marketplace, our good service, and those types of things. The addition of these riders that I spoke about is helping and just trying to keep doing what we've been doing for a long time.
I think there is some other companies that haven't been as aggressive that maybe is helping. I think there is some uncertainty of some other companies that are on the block to be purchased that when that happens, a lot of producers aren't really sure what their future is and so they look for another home and we're offering ourselves as an opportunity to be their next home.
John M. Matovina
Yeah, actually Randy that we don’t know about second quarter, but Aviva sales for Q1 were down significantly. And we kind of suspected perhaps a lot of that went to security benefit as opposed to come into American Equity.
And of course we don’t know the second quarter sales results yet. But one of the things that we were telling people when we were marketing the debt that I think just kind of builds on Ron's comments is in 11 out of the last 12 years.
American Equity has been either number two or number three in market share. And I think we’ve got a pretty well established position with those people who distribute for us.
And that’s been through all kinds of market conditions, competitive environments and that. So I think we’ve got an awfully good foundation with the agents that we have, that serving us well.
Randy Binner – FBR Capital Markets
Great, thanks. And I mean pending counts, is there any way to gauge how those are going so far this quarter or where they ended last quarter?
I imagine it's above 3,000, but any color there will be helpful.
John M. Matovina
Our pending count as of today is 3,108. It’s then bouncing around between the 3,100 and 3,300.
Today’s it’s actually probably a little bit lower than it has been for a while. I think part of that is it’s July and July historically is in the big production month unless there is some major thing happening.
And so I am optimistic based on some of the things that we’re doing that pending will begin the trend up again, once the vacation season ends and kids are going back to school and people start getting busy again. That’s my hope anyway.
Randy Binner – FBR Capital Markets
But that's usually pretty typical seasonality wise to see a dip like here August 1, right?
John M. Matovina
Yes. Our busy times of the year are historically in a spring, February, March, April and May and then things kind of sag a bit.
And then in middle of August and to September, October, November, they pickup and then kind of slowdowns. That kind of goes in waves.
Randy Binner – FBR Capital Markets
All right. I'll leave it there.
Thanks.
Operator
Thank you. The next question from the line of Mark Hughes from SunTrust.
Please go ahead.
Mark Hughes – SunTrust Robinson Humphrey
Thank you very much. Good morning.
So the growth in the agent count. Is that more a function of maybe getting more mind share, more of those agents from other firms, I guess like Aviva that are distracted.
Is that the message?
John M. Matovina
Well, I probably can’t give you an exactly reason Mark. That would be my assumption that there is agents looking for a home and due to our consistency in the marketplace over the years, hopefully they’re recognizing us as that home.
We went through kind of a housecleaning process. Our agent count was much higher in the past and we kind of decided that we needed to trim that roster, but not going to write business with us.
So let’s do each other a favor. We’ll save ourselves some hard dollars in reappointment fees and we’ll save them the headaches of receiving mail and e-mail from us.
And we still do continue to terminate those non-producers. But I think it’s a good sign, Mark that the agent code is creeping up again.
Mark Hughes – SunTrust Robinson Humphrey
Right. And so these would be more experienced producers that you're getting?
John M. Matovina
Well, I don’t know the answer that for sure, if they’re more experienced or not. That would be a good exercise for me to see.
Mark Hughes – SunTrust Robinson Humphrey
Yeah. And then just a big picture in a rising rate environment like this.
In your experience, other consumers look at your products, does their view of the attractiveness? Does it evolve as rates change, more attractive?
Do they start looking at other alternatives? What do you think?
John M. Matovina
I don't know that any of us sitting at this table have been in a rising rate environment to ask Mark. Personally we have, but our experiences with our index annuity policy holders, we got to go back a long way to the late 90s I guess, and I’m not even sure then.
But I think the times, when rates were higher, it makes the value proposition more attractive to people, while at the same time in the value proposition being as Ron described that the protection that you get from a safe money product with guarantees, but still having the upside opportunity. And those higher rates increased the ability for us to offer more attractive terms to people.
In general we think peoples attitudes towards risk are changing. For many years, the product was kind of sold for its accumulation aspects or that benefit of the indexing opportunity.
But the population is aging, and more and more the conversation is about what level of retirement income in this contract pay me over my lifetime expectancy. And so that higher rates will provide for more lifetime income as well.
Ronald J. Grensteiner
Mark, I think just to add on what John's saying, that’s why index annuities are such fantastic product is that there are safe money product historically, a fixed rates have been higher than CDs and other safe money products and we should have every reason to believe that as rates go up. We can stay ahead of CDs there too.
When things aren't so rosy on interest rates and the markets doing well, we have the ability to perform based on how well the SMP is doing. So we kind of got the best of both worlds.
Mark Hughes – SunTrust Robinson Humphrey
Right. Thank you for that.
Operator
Thank you. (Operator Instructions) And the next question is from the line of Steven Schwartz of Raymond James & Associates.
Please proceed, sir.
Steven Schwartz – Raymond James & Associates
All right, thank you. Hey, good morning, everybody.
If I remember correctly, John, you can comment on this 2005, going back to Mark's question, 2005 was an issue, but that wasn't so much rates going up, that was a flat yield curve, right?
John M. Matovina
Yeah, it’s actually 2006, we had flat yield curve and sales backed off then as people opted for CDs. I mean I think even in that year that CD rates like six month and one year were even better than the rates that we and the rest of our competitors were offering on our index annuity product.
Ronald J. Grensteiner
And so we set through the years that flat to inverted yield curves are just gradually up sloping yield curves are not the best environment for sales because of the attractiveness of other CDs. So that we want to be in a normal yield curve environment, which we’re certainly there today if not abnormal to our benefit in terms of the steepness of the yield curve.
Steven Schwartz – Raymond James & Associates
Okay, good. Just making sure that.
Ron mentioned that I guess new product, you've raised the cost of money. Wasn't clear to me if that was on fixed product or fixed deposits within index annuities or with regards to participation rates and caps.
Could you talk to that, maybe how much that was increased?
John M. Matovina
The new money rates were increased today approximately 25 basis points.
Steven Schwartz – Raymond James & Associates
Okay, so that…
John M. Matovina
In that I mean the fixed rate is up 25 basis points on the majority of the products. It’s actually more cap adjustments in participation rate adjustments.
They have been increase as well that the level of benefit that they went up would translate into 20 to 25 basis point increase in the costs of the option.
Steven Schwartz – Raymond James & Associates
Okay.
John M. Matovina
For new product sales only.
Steven Schwartz – Raymond James & Associates
Right. Okay, so that went from yesterday, it was X, today, it's 25 bps more…?
John M. Matovina
Yeah.
Steven Schwartz – Raymond James & Associates
What are those numbers?
John M. Matovina
125.
Ted M. Johnson
It was 125 now, Bonus Gold would be 150, Retirement Gold was 110, its now 135. The cap are now on Bonus Gold, it was 2.75%, its now 3.25% and on Retirement Gold, it was 2.5%, now its 3%.
And as John said that increase in the caps that’s reflect of cost of option of 25 basis points equal to what we increased on fixed rate.
Steven Schwartz – Raymond James & Associates
Okay. So all told the customer hears about 125 to 150, somewhere in that range.
And then so far through July, maybe you could talk about what kind of rates you’re getting on new money being invested?
John M. Matovina
I don’t have a report to tells me that.
Steven Schwartz – Raymond James & Associates
Okay. Well, I guess what I'm getting at John is, are we seeing a 300 bps on a new sale today?
John M. Matovina
Yes, we expect we’re getting 300, yes.
Steven Schwartz – Raymond James & Associates
Okay, that's where…
Ronald J. Grensteiner
In the way we get there, I think we said this before though is, there is an element of the portfolio yield that we’re allocating to new money. In effect the policy surrenders and lapses or partial withdrawals.
We look at in terms of our rate setting. We look at funding those out of the new premium cash flow, which reallocates than some of the portfolio yield to new money yield.
Of course if we were perfectly matched in our cash flows, you couldn’t do that, to say because you’d have for every dollar of redemption of money, you’d have a maturing investment. But it’s not that precise and in the big picture then that’s the way we look at it.
But we also then have to be mindful of where the spread is overall, because some of those investments, we may have maturing investments and don’t get the benefit of the portfolio yield.
Steven Schwartz – Raymond James & Associates
Okay. And I have a couple of other things.
How much, I guess total cash money coming in for maturity sales stuff that you took out of short-term as you got invested? How much cash did you just put to work this quarter?
Ted M. Johnson
At the end of June at $816 million.
John M. Matovina
No, he’s asking – no, the $2.6 billion.
Steven Schwartz – Raymond James & Associates
$2.6 billion.
John M. Matovina
That was invested, that is from your script is what he is asking.
Steven Schwartz – Raymond James & Associates
Okay, I missed that. And then one other, if I may.
Ted, assuming you're successful with regards to the exchange offers for the two converts. How much of the dilution will be wiped out, with the understanding that there's going to be shares issued to partially offset that?
So I think the total dilution was something north of 6 million shares.
John M. Matovina
The diluted shares in Q2 number were…
Ted M. Johnson
The diluted shares in Q2 number for the 2029 were 5 million shares.
Steven Schwartz – Raymond James & Associates
And for the other?
John M. Matovina
There is no dilution on the other, because of the call spread that's in place. For accounting purposes, there is no dilution for that.
Steven Schwartz – Raymond James & Associates
Okay.
John M. Matovina
And there was no dilution from the warrants in Q2, but that was because of the stock price was 16 or just under 16 was the price used to measure dilution on the warrants and the strike on the warrants was 15.8. So at current levels as stock price, the warrants are dilutive as well and would have a dilutive effect in Q3 earnings if there is still outstanding at the end of this quarter.
Steven Schwartz – Raymond James & Associates
Yeah, I was thinking about the warrants as the other one. Okay.
That's all I had. Thanks, everybody.
Operator
Thank you. Next question Ed Shields of Sandler O’Neill.
Please go ahead, sir.
Edward Shields – Sandler O’Neill
Hey, good morning, everyone. This is kind of a follow-up to Steven's question just a second ago, in relationship with the new money versus portfolio yield and the reallocation.
John, you had mentioned that the minimum guaranteed withdrawal benefit, when people utilize that that's where part of that shift comes from. I'm just wondering if with the recent rise in rates really since the end of the quarter or very late in the quarter, if there has been any tick up in policyholder utilization of that 10% withdrawal rate?
John M. Matovina
Ted M. Johnson
My guess is that there hasn’t been, I look at daily check. I mean every so often I’m signing checks that go out.
We think everyday and looking at those. I think it’s too early to see a change in policyholder behavior.
We’ll probably obviously have better ideas we get through, the third quarter and into the fourth quarter to see whether policyholder behavior has changed and whether they have increased their utilization of the 10% free partial withdrawal or some other level of surrender.
John M. Matovina
Yeah, there is still a lot of in force business, Ed that's sitting at rates that are well above even the 25 basis points that we just increased rate. So those older policies, they’re going to keep the money with us because the rates are getting is 275 or so maybe as well as 250 versus a 1.5 on a new money today.
Edward Shields – Sandler O’Neill + Partners, L.P.
Right, got it. That's it from me.
Thank you.
Operator
Thank you. The next question is from the line of Mark Hughes of SunTrust.
Please go ahead.
Mark Hughes – SunTrust Robinson Humphrey
Yes, thank you. John, you had sort of alluded to the several quarters in the future and I think you were talking about getting to 300 basis point spread again.
Could you maybe, I don't know if you can sharpen that up a little bit, what has to happen and how long will it take to get back to 300 basis points?
John M. Matovina
Well, we’ve got to make some fairly large broad-based adjustments to renew a crediting rates, which on the last call, I expected, we would have those in process that the time of this call and I guess I’d say with the time and effort we devoted to the bond offering that one did not move at the pace that I anticipated. So once that rate adjustment kicks in, it will take a full 12 months or the full benefit to be realized because the way rate adjustments happen is they will establish the terms, but they occur on the individual anniversaries, which obviously would occur over 12 month period.
Mark Hughes – SunTrust Robinson Humphrey
Right. Will that be harder, will your policyholders be a little surprised given that rates are moving up and that's what they'll be thinking about, and then they'll see the crediting rates coming down?
John M. Matovina
I don’t necessarily think, so we’re still talking about people that have current rates in many cases north of 3%. But it is going to be a little bit circumstances as point out that the direction of new money rates is slight up.
And the renewal rate adjustment is opposite. But one of the things we’ve said many times in the past too is that competitive wise we operate in a very open environment in terms of everybody knows what everybody else is doing on new money.
But the renewal rates adjustments, they’re not evident at all or you can’t other than anecdotally, or if you have a policy with American Equity and one of our competitors, you might be able to see what’s happening to renewals from the separate companies. But the breadth of data that you have available on new money rates to see what’s going on.
Mark Hughes – SunTrust Robinson Humphrey
Yeah. I mean not that many people have the tenure on their screen.
Okay, thank you very much.
Operator
Thank you, sir. You have no further questions in the queue.
I will now turn the call back to Ms. Julie LaFollette for closing remarks.
Julie L. LaFollette
Thank you for your interest in American Equity and for participating in today’s call. Should you have any follow-up questions, please feel free to contact us.
Operator
Thank you, ladies and gentlemen for your participation in today’s call. You may now disconnect and enjoy your day.
Thank you.