Nov 5, 2013
Executives
Julie L. LaFollette - Director of Investor Relations John Michael Matovina - Vice Chairman, Chief Executive Officer, President, Member of Executive Committee, Member of Disclosure Committee and Member of Investment Committee Ted M.
Johnson - Chief Financial Officer, Treasurer and Member of Disclosure Committee Ronald J. Grensteiner - Vice President and President of American Equity Investment Life Insurance Company Jeff Lorenzen
Analysts
Randy Binner - FBR Capital Markets & Co., Research Division Steven D. Schwartz - Raymond James & Associates, Inc., Research Division A.
Mark Finkelstein - Evercore Partners Inc., Research Division Mark D. Hughes - SunTrust Robinson Humphrey, Inc., Research Division Edward Shields - Sandler O'Neill + Partners, L.P., Research Division
Operator
Welcome to American Equity Investment Life Holding Company's Third Quarter 2013 Conference Call. At this time, for opening remarks and introductions, I would like to turn the call over to Julie LaFollette, Director of Investor Relations.
Julie L. LaFollette
Good morning, and welcome to American Equity Investment Life Holding Company's conference call to discuss third 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 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 Michael Matovina
Thank you, Julie, and thanks to each of you for joining us on the call this morning. Before we get into results, I'd like to let you know that not only did the company have a great quarter, but our policyholders did as well.
Our index annuity policyholders participated in stock market advance, with no risk to their fund value. The average index credit earned by our policyholders in the quarter was 5.8%, and the highest was over 18%.
So meeting the needs of our policyholders by offering upside participation at low risk is one of the reasons American Equity has been so successful over the years, and this value proposition still drives our business today. Ron will have some additional details on policyholder results.
So now let me discuss the strong results we produced for our stockholders this quarter. Our normalized operating earnings per share, and that is excluding the impact of the non-trendible DAC unlocking, grew almost 22% year-over-year.
And if we adjust last quarter's earnings for that Executive Life of New York guaranty fund assessment charge, we have now had 4 consecutive quarters of sequential increases in operating earnings. For the quarter, we generated operating earnings of $0.50 per share before the DAC unlocking benefit.
This was a solid performance considering our higher stock price contributed to a 6% increase in our diluted share count. And those earnings represent a return on average equity of 11.8% for the trailing 12 months.
Our spread performance continues to improve reaching 2.8% this quarter. As we expected, we fully deployed the excess cash and short-term investments balance that was pulling down the yield in our portfolio and are fully invested at the end of the quarter and today.
The rally in interest rates this last quarter has certainly been beneficial to us. But we are also continuing to stay focused on the crediting side of the spread equation and have flexibility for more action there as well.
Our attractive product attributes and excellent customer service culture, both to our distribution partners and our policyholders, enabled us to exceed $1 billion in sales again this quarter. While we do not intend to pursue sales and market share growth at the expense of acceptable profits, we would like to sustain and grow our quarterly sales levels which is important as our asset base grows.
Sales should grow naturally due to the nature of our product and how well it fits with an aging U.S. population that needs principal protection, but upside opportunity for the retirement savings dollars.
As usual, Ron's remarks will include commentary about sales results in the competitive environment. And then finally, we took some actions this quarter to simplify and improve our capital structure.
In July, we issued $400 million of 8-year notes. The proceeds from that issuance are earmarked to retire our outstanding convertible debt issues, and about 1/3 of the outstanding convertible notes were retired last month in -- to exchange offers.
When I come back at the end of the call, I'll have more to say about plans to retire the convertible notes that remain outstanding. So with that, let me turn the call over to Ted who can fill you in on more details on the operating results for the quarter.
Ted M. Johnson
Thank you, John. Our third quarter operating income was $59.8 million or $0.80 per diluted share, including the effects from unlocking during the quarter, compared to $22.2 million or $0.34 per diluted share for the third quarter of 2012.
The results include a 14.2% increase in diluted shares for the quarter compared to the third quarter of 2012, due to the increase in our stock price which equates to $0.11 per share. Excluding the impact from unlocking, operating income was $37.4 million or $0.50 per diluted share compared to $27.1 million or $0.41 per diluted share in the third quarter of 2012.
Unlocking includes revisions to assumptions for DAC and deferred sales inducement amortization and similar revisions to assumptions used in determining the liability for future benefits to be paid under lifetime income benefit riders. We also modified assumptions used to determine the indexed annuity-embedded derivative liability to be consistent with the changes we made in unlocking, but the outcome of those changes only affect reported net income and not operating income.
Normalized third quarter operating income of $37.4 million or $0.50 per diluted share compared to second quarter operating income, excluding the effects of the guaranteed fund assessments for Executive Life of New York, was $35.8 million or $0.51 per diluted share. A 5.9% increase in diluted share count for the third quarter is what caused our diluted per share amount to be lower than the second quarter.
Investment spread for the third quarter was 280 basis points, and total invested assets at September 30 were $29.8 billion. Our spread result of 280 basis points was 10 basis points more than the previous quarter spread of 270 basis points.
As John commented, we met our expectation of eliminating our excess cash and short-term investment balances and achieved a fully invested position during the quarter. We did not have any excess cash or short-term investments at the end of the quarter.
The average cash and other short-term investment balance during the third quarter was $341 million compared to $1.7 billion during the second quarter. Partially offsetting the cost of liquidity was 5 basis points from prepayment income on commercial real estate mortgages and consent fees on bonds.
In addition, we have 3 basis points of benefit from over-hedging in the third quarter. Our cost of money declined to 2.22% in the third quarter from 2.24% in the second 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 restore our 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. During the third quarter, we purchased $1.5 billion of new fixed-income securities on an average yield of 4.38%.
And we funded $170 million of new commercial mortgage loans at an average yield of 4.24%. The majority, $979 million of the security purchases, were predominantly investment grade corporate bonds with an average yield of 4.32%.
We also purchased $335 million of commercial mortgage-backed securities with an average yield of 4.7% during the quarter. During the third quarter, we had no calls of government agency securities.
At current rates and market conditions, our call exposure for future periods is limited to $500 million of government agency securities maturing in January 2028, with 3.75% coupons. These securities 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, which is January 2014.
We also own $660 million of 15- to 20-year government agency securities that become callable at various times in the next 3 quarters. However, based upon current interest rates, we do not expect these securities to be called.
Now with our total call exposure down to less than $1.2 billion, we believe any future calls would be manageable and could be dealt with fairly promptly. It -- interest expense for notes payable was $13 million compared to $6.8 million in the second quarter of 2013.
The larger expense is due to the issuance of the $400 million 6.625% Senior Notes in July 2013. In October 2013, we used $128 million of the net proceeds from the notes issuance to retire $102 million of aggregate principal amount of convertible notes.
Interest expense will decline in the fourth quarter due to the retirement of the $102 million principal amount of convertible notes in October, but will continue to remain at higher levels than recent quarters until such time additional convertible notes are redeemed or repurchased. Operating costs and expenses were $20.7 million for the third quarter compared to $24.9 million in the second quarter and $19.5 million in the first quarter.
As we reported last quarter, operating costs and expenses for the second quarter included $8.5 million expense for the guaranty fund assessment related to the insolvency of Executive Life of New York and a credit of $3.2 million for the Stephens law suit. That puts normalized operating expenses for the third quarter about $1.1 million more than the second quarter operating expenses of $19.6 million.
This increase in operating expense is primarily due to the increase in our stock price, which affected the amount of expense recognized for certain compensation items tied to the fair value of our common stock. Page 8 of our September 30 financial supplement includes a pro forma capitalization table and certain other pro forma information related to the exchange offers for our convertible notes that were completed last month.
In addition to the $128 million of cash I mentioned earlier, the consideration paid to the exchanging noteholders included $3.1 million shares of our common stock. On a pro forma basis, our September 30 book value per share was $18.38 compared to $18.66 at June 30.
As I commented in last quarter's earnings call, unlike diluted earnings per share, there is not an established accounting protocol for determining diluted book value per share, and the book value per share numbers we report do not include any potential dilution from convertible securities and stock options. We estimate that the exchange offers, and related early termination of a portion of the call spread tied to one of the convertible note issues, reduced our book value per share by $1.19.
With the recent strength in our stock price, potential further reduction in book value per share from conversions or retirements of our convertible notes could be meaningful. Our RBC at September 30 was estimated at 333%, up from 324% at the end of last quarter and 332% at the end of 2012.
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.
We had a great quarter in so many respects, and as John pointed out, our policyholders had a good quarter as well. With the average index credit in the third quarter of 5.77% and the maximum index credit for any one strategy was 18.16%, and this extends the streak of better-than-average quarterly index credits to 5 quarters.
In the first 9 months of this year, the average index credit was 5.39% and the maximum credit was just shy of 19%. Approximately, 39% of the index credits posted in the first 9 months exceeded 6%, 71% exceeded 4%, and 85% of the index credits posted exceeded 3%.
These are fantastic results considering our first priority as principal protection and guarantees, and when compared to other safe money products like certificates of deposits, money markets, bonds, to get an average index credit over 5% with the strong guarantees of our FIAs is a great story. Sales for the third quarter were $1.05 billion compared to $1.13 billion in the second quarter of this year.
Sales were up, however, over the third quarter of 2012 of $981 million. This is the first time we've seen back to back billion-dollar quarters since the fourth quarter of 2011 and the first quarter of 2012.
Sales are up 8.4% for the first 9 months of this year compared to the first 9 months of last year. Our pending count averaged around 3,150 during the third quarter and remained in a pretty tight range from the low-3,000s to the high-3,100s.
Today, our pending count is 3,124. Our competitors have not announced third quarter numbers yet, so we don't know exactly where we stand.
However, the fixed indexed annuity market is increasing and our market share is also increasing. Through the second quarter of this year, our FIA market share was 11.54% up from 10.52% last year.
It seems the competition is a little hungrier though this year for business, as they have introduced some new index crediting strategies, as well as increased some premium bonuses and have run some commission incentives. American Equity has not had a commission incentive since the spring of 2011.
So to stimulate our own sales and combat some of the other companies' incentives, we did introduce our own 6-week commission incentive where producers can earn an additional 50 basis-point commission up to a 1% commission bonus depending on sales volume. This should help us continue our momentum for a third consecutive billion-dollar quarter.
Eagle Life is also making significant progress. We have hired a new wholesaling firm who has a national footprint and works mainly with broker dealers.
We also have 2 new wholesaling firms that focus on bank distribution. While the bank channel has been known more for multi-year guaranteed annuities, fixed indexed annuities are catching on, and in some cases, fixed indexed annuity sales exceed those of the multi-year variety.
We're finding, however, that these distribution channels require a lot more patience on our part than the traditional independent agent channel. There is much more product and company due diligence and the process is done by committee.
We definitely feel though that Eagle Life is on the right track, and we look for respectable sales results in the first quarter of 2014. As of the end of October, American Equity has 986 Gold Eagle members who have qualified or on-time to qualify by year end.
This number is up from 881 a year ago. To refresh your memory, Gold Eagle members are those that produce at least $1 million of paid annuity premium during the calendar year.
Historically, these producers have been responsible for approximately 57% to 58% of our total production, so we certainly want to pay extra special attention to these producers. As the Gold Eagle count goes, so goes production.
We will be attending our agent's convention this week, where we will have our very best Gold Eagle members. To qualify for our convention, producers need to write a minimum of $3 million in paid annuity premium between July 1 and June 30 of the following year.
This year, we will have 202 producers in attendance, responsible for $989 million in sales. That's an average of $4.9 million per producer, which is outstanding.
So you can count on us to be very appreciative over the next few days with these outstanding producers. We often get the question of why sell for American Equity when there are larger, older companies with more products in our distribution channel, and I think you need to start with the fact that our senior leadership team has been together for an average of 15 years.
Some of us have been together for over 20, and yet others over 30. We know how to work together and we know how to run an insurance company.
Consider that Dave Noble formed this company from scratch in 1995 and since, we have navigated to the economic downturns of 2001 and 2008 and all-time low interest rates to become a $38 billion company. Our cornerstone is what we will offer as the best customer service in the industry, and we have to have competitive products, rates and commissions, of course, but the competition can always beat you in rates and commissions.
Excellent service is the culture and it can't be duplicated, at least not over the short term. And I'm so proud of our home office team.
They genuinely want to do a good job for our producers and our policyholders, and it's really the basic stuff, like issuing policies, withdrawal checks, paying commissions, all on-time in an accurate fashion. And, of course, our phones are answered by a live person in our West Des Moines office within 1 minute of connecting with the switchboard.
I received a text the other day from one of our Gold Eagle producers. He said, every once in a while, I send a piece of business to one of your competitors and every time I do, I regret it.
Finally, a great example of American Equity's culture is our client appreciation events. We started doing these events in 2010.
We felt our policyholders were entitled to hear directly from us and have some reassurance that their money was safe and that the company was rock solid financially. We give a 1-hour presentation about American Equity's culture and financials and then we recap some of the ABCs, 123s of fixed annuities.
We serve a nice buffet lunch, give away some door prizes, pay tribute to our veterans and send them on their way. And we don't sell them a darn thing other than ourselves.
Every time we hold an event, the people leave very satisfied that their money is in a good place. We know this because they tell us.
They tell us at the events, and through the many cards and e-mails we receive after the event. It's a very gratifying and humbling experience.
So far, we've had 70 events around the country, hosting nearly 14,000 policyholders and 874 Gold Eagle agents. And for every policyholder that has attended, I'll bet they have told another 3 to 5 people about their experience.
And so far, not a single competitor has followed our lead. So with that, I'll turn it over to John.
John Michael Matovina
Thank you, Ron. So briefly summarizing, giving a little -- thoughts about -- our thoughts about the future, certainly with sales of $3.1 billion for the first 9 months and some momentum heading into the fourth quarter, that positions us for a $4 billion year.
But -- however, as I said in my opening remarks, we are going to be mindful of our profitability and as has always been, the philosophy at American Equity, we will not pursue sales and market share growth at the expense of acceptable profits. We remain committed to a disciplined approach to spread management and product pricing, and are going to continue to work on the liability side of the spread equation to make some further rate adjustments with the goal of moving that 2.8% third quarter spread back up to the target of 3%.
In terms of our balance sheet, the $400 million proceeds from our Senior Note offering, we've got about $270 million of cash left that's available for further retirement of our convertible notes, and it's our objective to redeem or repurchase the $214 million that still remain outstanding. The form and timing of any such activity is going to be dependent upon market conditions and other factors.
And there can be no assurance that we'll be able to complete any transactions prior to the call date for the 5.25% notes, which is December of next year, or the maturity for the 3.5% notes, which is September of 2015. We did have a period following the closing of the exchange offer where we were not free to entertain any discussions with any holders, but that period has now expired and so I think over the course of the next several days or weeks, we will be having some conversations with holders of the -- that still hold the notes with the objective of entering into private transactions with those entities and further retiring some additional portion of the notes.
And beyond that, we'll be playing it by ear, I guess so to speak, following the -- whatever success we might have there, as to what course of action follows then to get the balance of the notes in. The results for Q3 in the past several quarters confirm our commitment to grow American Equity.
Our operating income per share, exclusive of the impact of the unlocking, grew almost 22% over the year-ago quarter. Our assets under management are up 14% for the trailing 12 months.
We've delivered this 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 American Equity is well-positioned to capitalize on the growing demand for guaranteed retirement savings products, and we expect our invested assets and earnings to continue to grow in the periods ahead.
So with that, operator, we'd be happy to take any questions from the callers.
Operator
[Operator Instructions] Your first question comes from the line of Randy Binner of FBR Capital Markets.
Randy Binner - FBR Capital Markets & Co., Research Division
I'm going to try and ask a question on the next version of the tender. And then I guess I would say, you have the $270 million in cash that John identified at the holding company, and so that would be seemingly more than enough to kind of cash settle these converts, but the structure of the previous convert tender had a combination of cash and stock.
And so, I guess my question is, should we assume that you would have a similar structure of kind of cash and share settlement if you are able to negotiate a tender for these converts going forward?
John Michael Matovina
Yes, you should, Randy. The parity value of those converts based upon yesterday's price, not this morning's, was $393 million.
So with $270 million of cash, we were going to be short $123 million, and in addition to that -- in addition to parity value, the holders would be expecting some sort of inducement premium to tender early, so it would be even a little bit higher than that. So yes, any transactions are going to likely involve a combination of cash and shares.
Randy Binner - FBR Capital Markets & Co., Research Division
Okay. Perfect.
That's exactly what I was looking for. And then on -- despite all that cash that's in the holding company, is there anything you can do with it investment-wise in the meantime?
John Michael Matovina
Unlikely, no, than our short-term rates, but the money is earmarked for the retirement of the convertible debt. I suppose, if we got through a portion of next year and reached the conclusion that whatever we're unable to retire between now and then was not going to be feasible to get in before we either put our call date or maturity date, we might look at targeting something that had a maturity that coincided with those.
But I don't see us taking any kind of interest rate risk on those funds, so the best move is to eliminate the debt.
Randy Binner - FBR Capital Markets & Co., Research Division
Understood. And then just one quick one, if I could.
I think that the investment income result in the quarter benefited from the use of repo going forward a little bit on the portfolio, which I think is something that you did a long time ago and that you started doing again recently. Is there any way to kind of give us color on how we should think about modeling for that or assuming kind of the additional benefit of that going forward?
John Michael Matovina
What's the balance today?
Ted M. Johnson
$148 million, around $148 million.
John Michael Matovina
The previous program that we had targeted specifically 1 to 2 months of sales in repo, in effect a forward purchase of investments to back the annuity liabilities, so that when -- as we started having to credit interest to the policyholders, we already had a permanent-type investment to support that. So I understand our repo balance now is about $148 million.
I can see an average of $150 million to $300 million as being something that we would look at operationally for now.
Randy Binner - FBR Capital Markets & Co., Research Division
Okay. So more like, I guess not even a month's forward sales relative to the other...
John Michael Matovina
Right.
Operator
Your next question comes from the line of Steven Schwartz of Raymond James & Associates.
Steven D. Schwartz - Raymond James & Associates, Inc., Research Division
A couple. On Eagle, a couple of things.
Were there any new agreements signed in the quarter? Or since quarter to date in the fourth quarter, if you're allowed to mention that?
Ronald J. Grensteiner
We do -- we did get 4 new selling agreements in-house during the quarter, and we have multiple additional selling agreements which we have commitments but no signed documents yet. So we're making good progress there.
Steven D. Schwartz - Raymond James & Associates, Inc., Research Division
That is good. Ron, I think you mentioned you hired wholesalers.
I think that was the word "hired" that you used. Is this process somehow different than dealing with the NMOs that typical go to your individuals?
Ronald J. Grensteiner
Well, it is a little bit different, Steven, in that we do call them wholesalers, they're independent, but we won't have 60 of them. We'll probably have as many as we have, which is -- we have the 1 with the national footprint, we have the 2 that look at banks, and we have another 1 that we're looking at.
So I don't expect us to really expand beyond 4 or 5 wholesalers. And I've learned that the dynamics are a little bit different on this side of the house and that the wholesalers really try to work for the company and focus on a company or 2.
Where on the other side, the independent channel, they got, 15, 20 companies they're trying to promote. So a little -- it is a little bit more focused on the Eagle side, and which has been different for me.
Steven D. Schwartz - Raymond James & Associates, Inc., Research Division
Okay. And this is all commission-based as well?
Ronald J. Grensteiner
Yes.
Steven D. Schwartz - Raymond James & Associates, Inc., Research Division
Okay. And then Ted or John, the cost of money came down a couple of bps in the quarter.
You're at 280. A couple of bps a quarter isn't really going to get you to 300, certainly not 300 for the year, for next year.
Do you have anything immediately planned that maybe you could share...
John Michael Matovina
The -- we have got activity ongoing to analyze that, but nothing to -- nothing specific to announce at this point. There has been an ongoing modest reduction of some certain policies that haven't been adjusted yet, and that's going to be -- that's going to extend in some -- in the policies that were issued in, I think it's January of 2011.
So right now, it's been catching policies issued through 2010, but there needs to be another one that is being examined to go back and make some incremental adjustments on policies that have already been reduced once over the course of the last several years.
Steven D. Schwartz - Raymond James & Associates, Inc., Research Division
I know you don't give guidance, not interested in giving guidance, but is the target here to get 300 for the year or just to get back to 300 in 2014?
John Michael Matovina
Just to get back to 300 in 2014.
Operator
Your next question comes from the line of Mark Finkelstein of Evercore.
A. Mark Finkelstein - Evercore Partners Inc., Research Division
Maybe just following up on Steven's question, I guess, and I had a similar thought. Where we sit today, do you feel more or less confident about achieving your 300 basis-point target in 2014?
John Michael Matovina
Relative to last quarter?
A. Mark Finkelstein - Evercore Partners Inc., Research Division
Yes.
John Michael Matovina
I'd say it's probably neutral. I felt confident about it last quarter.
I feel confident about it this quarter, too.
A. Mark Finkelstein - Evercore Partners Inc., Research Division
What would have to happen for you to not achieve that 300 basis points? What in the macro, what in your own decision-making?
John Michael Matovina
We'd have to decide not to make any further reductions in renewal crediting rates.
A. Mark Finkelstein - Evercore Partners Inc., Research Division
Okay. Maybe just moving on then.
The -- just in thinking about the tender a little bit, and maybe I'll ask the question this way. Obviously, you've had a little bit of time where a number of people didn't participate.
They've presumably made inbound phone calls to you. You have not been able to respond necessarily.
But in terms of thinking about the inbound calls that you've received, is there any way of framing out how much of the remaining untendered securities that represents?
John Michael Matovina
We-- I can think of a couple of holders. One's -- one has a position of like $20 million, another one has a position of $25 million, and one's $13 million or $14 million.
A. Mark Finkelstein - Evercore Partners Inc., Research Division
I mean, do you feel fairly confident that as we -- if we were to kind of look here 6 months from now that a good percentage of the untendered securities would be dealt with?
John Michael Matovina
I wouldn't necessarily want to speculate on that. Until we get into an actual negotiation with somebody and get a deal cut, that -- things sound encouraging now, Mark, but we don't have any negotiations.
We don't know how they're going to go, and the holders may want to price more than we want -- we're willing to pay. And I hope that's not the case.
I hope we have success with the 3 large positions I just indicated we're aware of, and more on that, too. But I really wouldn't want to speculate on how that might turn out or where we might be.
A. Mark Finkelstein - Evercore Partners Inc., Research Division
Okay. And then just one final question.
In terms of the restructured reinsurance treaty that added some RBC points this quarter, are there any earnings implications going forward in this new treaty that we should be thinking about?
Ted M. Johnson
That's going to add about $940,000 of expense each quarter as you have an additional $75 million, and the effect of cost of capital on that treaty is 5%.
John Michael Matovina
Pretax.
Ted M. Johnson
Pretax.
Operator
Your next question comes from the line of Mark Hughes from SunTrust.
Mark D. Hughes - SunTrust Robinson Humphrey, Inc., Research Division
Ron, in terms of your sales momentum, say, through the quarter, was it steady? Did it pickup?
You had the interest rates moving up earlier in the year, but it kind of stabilized here. Has that had a discernible impact on your sales volume?
Ronald J. Grensteiner
It's already been pretty steady, Mark, over the third quarter. September was down a bit as -- or I should say, August was down a bit, as August usually is, as agents go on vacation, but we did have a good rebound in September.
But overall, the quarter was pretty steady.
Mark D. Hughes - SunTrust Robinson Humphrey, Inc., Research Division
And then, did you give the number for contracts outstanding?
Ronald J. Grensteiner
You mean the pending count?
Mark D. Hughes - SunTrust Robinson Humphrey, Inc., Research Division
Yes, yes.
Ronald J. Grensteiner
I did, and that was 3,124. And the window during the quarter ranged from the low-3,000s to the high-3,100s.
So it's been in that range the whole quarter.
Mark D. Hughes - SunTrust Robinson Humphrey, Inc., Research Division
And then, how do you think your market share -- I think you've sort of alluded to this, but how do you think your market share will -- held up in Q3?
Ronald J. Grensteiner
That's a good question. When the second quarter came about, I thought we did all right.
And then when the competitors announced their numbers, I was very, very pleased in that our market share actually increased, and as a lot of our competitors have been running some commission specials and trying to grab market share away from us. So we held our own as the pending count and production indicates, so it will be interesting to see how everybody else did.
Mark D. Hughes - SunTrust Robinson Humphrey, Inc., Research Division
Yes, and then I was -- the new commission structure or the new initiative you got in place to boost sales, could you give that just one more time? And to the extent that you've done that in the past, how meaningful has it been for your results?
Ronald J. Grensteiner
Well, the commission bonus is, I believe, I don't have the exact statistics in front of me, but I think they had to do $300,000 to $350,000, somewhere in that range, to get the 50 basis-point bonus. If they did, $70 -- $750,000, they got a 75% bonus, and if they did $1 million or more, they got 100 basis points on that premium.
And it's for applications that we receive in about a 6-week window and then we give them until the end of December for those transfers, and then 35 exchanges to get funded. When we have done them in the past, we have always had a nice shot in the arm from sales.
So we're hoping for the same result here.
Operator
[Operator Instructions] Your next question comes from the line of Ed Shields from Sandler O'Neill.
Edward Shields - Sandler O'Neill + Partners, L.P., Research Division
I think I've got a follow-up question for Ron here on the competitive environment. You have given some nice information here, but I was just wondering if there is any sign of new entrants or maybe some of the legacy players getting more proactive versus the dormant -- the little bit of weakness they had in some prior quarters with the things involving them.
Any update there could be useful.
Ronald J. Grensteiner
Well, we still see the private equity owned companies being very aggressive. They haven't seemed to back off at all.
A couple of our core competitors that we've competed with for years and years, Allianz and Aviva/the new Athene. Allianz has -- their market share is going down but they have also seemed to be more aggressive as well in that they raised some of their premium bonuses and ran their own commission special.
Aviva/Athene is down a quite a bit this year. We haven't seen what their third quarter numbers look like.
And since Athene is the new owner, we haven't seen any major announcements or any major marketing programs get introduced. So we're not sure how aggressive they are going to be the balance of the year.
So -- and there's a number of what I call in-and-outers, where they get into the market and make a splash and then get out. I haven't really seen much of that either.
It -- there's just been -- private equity has probably been the dominant force as far as competitors.
Edward Shields - Sandler O'Neill + Partners, L.P., Research Division
So basically, nobody's been entering the market new. I remember, a while ago, there were a couple of potential new entrants, maybe a year ago, kind of waiting in the wings but they hadn't actually started sales.
Ronald J. Grensteiner
There's nobody that comes to mind. I can't think of anybody that pops up at the moment.
Edward Shields - Sandler O'Neill + Partners, L.P., Research Division
Okay. Great.
Another question here. I know I've asked this before on the prepayments income.
If I do my math right, it's about $3.5 million in the quarter. The 5 bps, should we expect that to kind of remain flat going forward, or is there any expectation for that to taper off with the interest rate environment being what it is?
John Michael Matovina
Ed, I'm not sure how to answer you there. Through the course of the last number of quarters, there's been some variability that you can't necessarily explain.
So sometimes, you get some commercial mortgages teed up for refinance, so I'm not sure it's necessarily predictable.
Edward Shields - Sandler O'Neill + Partners, L.P., Research Division
Okay. Fair enough.
And I'll just finish with one last one here. Can you talk about any conversations you've been with the rating agencies and how that -- any of the -- any dialogue there has been going forward?
John Michael Matovina
We have had a quarterly -- our annual meeting with A.M. Best, the face-to-face management meeting.
There were, I guess, no surprises in that meeting. I think that Best has announced their rating actions on us.
The last several years, it's actually spilled over from the timing of a fourth quarter meeting to sometime in the first quarter, but they indicated they might be getting that moved up this year. So, perhaps, we'll have a rating announcement from them before the end of the year.
I guess I would be surprised if there was any movement one way or another, and I'm uncertainly not expecting anything to the downside from them given the financial performance and the fact that we continue to maintain good market share, leadership in the marketplace and good profitability and capital adequacy. I know they always are -- have a strike against us because of the monoline nature of the company and the fact that their evaluation of insurance products, they put -- say, whole life is the safest or highest-rated product.
They have fixed index annuities, kind of toward the middle, actually a little bit slightly to the right in terms of what their view is. So I think, perhaps, if we had -- if our line of business was 100% whole life as opposed to 100% fixed index annuity, we might have a higher rating from them.
But given the nature of our product and where their views are on it, as I say, I think the rating is likely to stay where it is. And, of course, S&P, we're on a favorable outlook or positive outlook from them.
But that was announced in the summer, I really wouldn't anticipate that -- the next rating activity from them comes sometime next summer.
Operator
Your next question comes from the line of Steven Schwartz of Raymond James & Associates.
Steven D. Schwartz - Raymond James & Associates, Inc., Research Division
Did you mention, John, kind of what you've been doing on the investment side, the new money rate on the investment side, so far through this quarter?
John Michael Matovina
No. We didn't.
Would you like us to?
Steven D. Schwartz - Raymond James & Associates, Inc., Research Division
I would really appreciate that.
John Michael Matovina
Jeff's here in the room. I'll let him talk about securities.
I'll make a couple of comments first about the commercial mortgages, which I think that funding rate was 420, Ted, in the first...
Ted M. Johnson
424.
John Michael Matovina
424. I know the rates -- the loans we have been seeing in committee over the last number of weeks, which -- probably not very many of those funded in the third quarter, so they'll fund in the fourth quarter.
We're at rates higher than that, and I'm not sure we've approved anything recently below a, say, a 470-ish to 480-ish range and actually had some above 5%. So we are going to see a higher rate on commercial mortgage loans.
And I guess, where those rates were at, they're actually a little bit lower now than when we were approving at 5%, so they backed up a little bit, commensurate with the back-up in the 10-year treasury. And Jeff, talk about securities for October.
Jeff Lorenzen
In general, the securities for the third quarter were 4...
John Michael Matovina
Fourth quarter, fourth quarter.
Jeff Lorenzen
Okay. All right.
Excuse me, 4.38%. A good portion, about 60% which is what we allocate to corporates, was in corporate purchases.
The remainder were in CMBS, an area that we've been adding exposure to, some municipals, some RMBS, agencies trying stay diversified in each of the sectors, not trying to get too overweighted in any one sector.
Steven D. Schwartz - Raymond James & Associates, Inc., Research Division
Okay. So it sounds like new money in October is 470, 480, all in?
Jeff Lorenzen
It might be on the high side...
Ted M. Johnson
Probably on the high side, probably 440-ish...
Jeff Lorenzen
440-ish, 450.
Operator
Thank you. Ladies and gentlemen, I would now like to turn the call over to 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
Ladies and gentlemen, that concludes your presentation. You may now disconnect.
Thank you for joining, and good day.