Feb 13, 2014
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 Jeffrey D.
Lorenzen - Chief Investment Officer and Senior Vice President of Investments
Analysts
Steven D. Schwartz - Raymond James & Associates, Inc., Research Division Randy Binner - FBR Capital Markets & Co., Research Division Mark D.
Hughes - SunTrust Robinson Humphrey, Inc., Research Division Edward Shields - Sandler O'Neill + Partners, L.P., Research Division A. Mark Finkelstein - Evercore Partners Inc., Research Division
Operator
Welcome to American Equity Investment Life Holding Company's Fourth Quarter 2013 Conference Call. At this time, for opening remarks and introductions, I will like to turn the call over to Julie LaFollette, Director of Investor Relations.
Please proceed.
Julie L. LaFollette
Good morning, and welcome to American Equity Investment Life Holding Company's conference call to discuss fourth 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 this actual result 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 good morning, everyone. Before I discuss results, I wanted to let you know that not only did the company have another great quarter and a great year, but our policyholders did as well.
Our index annuity policyholders participated in the stock market advance with no risk to their fund value. During the fourth quarter, the average index credit earned by our policies -- policyholders who had a policy anniversary in the fourth quarter was 6.57%.
And for all of 2013, the policyholders average credit was 5.73%. And the highest credit was in the fourth quarter at 22%.
So not bad results for not taking any risk of loss of principal in a fixed index annuity. So meeting the needs of policyholders by offering upside participation at low risk is one of the reasons why 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.
For the quarter, our operating earnings were $39.8 million, up almost 29% year-over-year, and that translated into $0.50 per share for the quarter. This is a very solid performance considering our higher stock price contributed to a 6% increase in our diluted share count compared to the third quarter, and a 20% increase in our diluted share count compared to fourth quarter 2012.
Our 2013 full year operating earnings represented return on average equity of almost 14% or 12% if you exclude the unlocking benefit that we discussed in the third quarter call. During the quarter, we paid out our annual cash dividend, the amount was $0.18 per share, that was 20% increase from the prior year, and marks the 15th consecutive year American Equity has a paid cash dividend.
And we've increased our annual cash dividend for the last 10 years. Our spread result for the quarter did regress by 7 basis points.
Ted will discuss details in his remarks, including the variance in our hedging results. We do remain confident in our hedging process with process which has proven highly effective through the years, typically results in a plus or minus 1% or 2% over that period of time.
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. As we've said repeatedly in the past, while we do not intend to pursue sales and market share growth at the expense of acceptable profits, we do want to sustain and grow our quarterly sales levels.
While 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 their retirement savings dollars, we intend to maintain an active presence in the marketplace.
As usual, Ron's remarks will include commentary about sales results in the competitive environment. And finally, we deployed a portion of the proceeds from our $400 million senior note offering from last July and retired almost 1/2 of our outstanding convertible debt.
Ted will have some additional details on the financial outcome of the convertible debt retirements and our plans to retire the balance of the convertible notes. So that, let me turn the call over to Ted for his comments on operating results.
Ted M. Johnson
Thank you, John. Our fourth quarter operating income was $39.8 million or $0.50 per diluted share compared to $30.9 million or $0.47 per diluted share for the fourth quarter of 2012.
The results include a 19.9% increase in diluted share count, which equates to $0.10 per share. The increase was due to shares issued during the year for retirement of convertible notes and exercise of stock options.
In addition, there was greater dilution from convertible notes, warrants and stock options outstanding due to the company's common stock being at a much higher price in the fourth quarter of 2012 compared to the fourth quarter -- in the fourth quarter of 2013 compared to the fourth quarter of 2012. Fourth quarter operating income increased 6% compared to the third quarter operating income, excluding the effects of unlocking of $37.4 million or $0.50 per diluted share.
Investment spread for the fourth quarter was 273 basis points and total invested assets at the end of the year were $30.3 billion, $29.6 billion on an amortized cost basis. Our spread result of 273 basis points was 7 basis points lower than the previous quarter spread of 280 basis points.
Spread performance was impacted by average yield on investments, which declined 5 basis points when compared to the third quarter, due to investment of new premiums and portfolio cash flows at rates below the portfolio rate. The average yield on invested assets was 4.97% for the fourth quarter, while the average yield on fixed income securities purchased and commercial mortgage loans funded was 4.48%.
The aggregate cost of money for annuity liabilities were 2.24% in the fourth quarter compared to 2.22% in the third quarter. Although the company continued to reduce its cost of money through lowering crediting rates, progress in the fourth quarter was offset by hedging results.
The 2 basis point increase in the aggregate cost of money was directly attributable to hedging results. We were 3 basis points under-hedged in the fourth quarter and 3 basis points over-hedged in the third quarter.
As we have cautioned on previous occasions, our challenge with hedging is matching the volume of call options to the policy obligations. Historically, we have managed that process toward an over-hedged outcome.
However, policyholder behavior does not always match our expectations, and occasionally, we have a quarter where we are under-hedged. The 3 basis point variance for fourth quarter translates into 99% hedging effectiveness.
During the fourth quarter, we purchased $1.2 billion of new fixed income securities at an average yield of 4.44%, and we funded $131 million of new commercial mortgage loans at an average yield of 4.79%. The majority, $914 million of the security purchases, were predominantly investment-grade corporate bonds with an average yield of 4.51%.
We also purchased $105 million of commercial mortgage-backed securities with an average yield of 4.34%. During the fourth quarter, we had no calls of government agency securities.
And our call exposure is unchanged from what we reported last quarter. 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, and $616 million of 15 to 20 year government agency securities with coupons ranging from or ranging between 2.96% and 3.2% that are callable at various times in the next 2 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.
Annuity product charges for the fourth quarter of $15.2 million included $4.7 million of surrender charges deducted from California policyholders surrendering their policies as a condition of receiving certain benefits in a national class action lawsuit settlement. Excluding this nonrecurring amount, annuity product charges were $600,000 less than third quarter.
The after-tax impact on operating income, including related adjustments to the amortization of deferred sales inducements and deferred policy acquisition cost was $2 million or $0.02 per diluted share. The benefit from this item helped offset the negative impact of the hedging outcome on spread results.
However, this item contributed to the expense related to class action litigation settlement that I will discuss shortly. Interest expense for notes payable was $11.9 million compared to $13 million in the third quarter of 2013.
The decline is due to the retirement of convertible notes in the fourth quarter. Interest expense will decline further in the first quarter of 2014 as the full effect of the convertible notes retired in the fourth quarter is realized and additional convertible notes were retired subsequent to year end.
As we reported earlier this week, $22.7 million principal amount of our 5 1/4% convertible notes due 2029 were retired on February 10, 2014. Other operating costs and expenses were $26.9 million compared to $20.7 million in the third quarter.
The fourth quarter amount includes $4.2 million increase in the estimated class action litigation liability based upon developments in the claims process for the settlement of the McCormack litigation and third-party costs incurred in fourth quarter associated with the administration of the settlement. Settlement claim forms were due for members of the class by December 6, 2013.
On January 29, 2014, the court signed a final order approving the settlement and finding the settlement as fair. Consistent with our prior reporting, this item is excluded from our operating earnings.
Excluding this item, operating expenses for the fourth quarter were $2 million higher than the third quarter. This increase was primarily due to certain share-based compensation that is based upon the current fair market value of our common stock.
During the fourth quarter, we completed public and private exchange offers with holders of our 2 outstanding convertible debt instruments and retired $155 million aggregate principal amount of the convertible notes. The total consideration paid included $191 million of cash and 5.3 million shares of our common stock.
While these convertible debt retirements eliminate the potential dilution from future increases in our common stock price, they negatively impact net income and book value per share. We estimate that these convertible debt retirements and related early termination of a portion of the call spread of our common stock associated with one of the convertible debt issues reduced book value per share, excluding accumulated other comprehensive income, by $0.89 per share during the fourth quarter and by a $1.68 per share in 2013.
As I commented in the last 2 quarterly conference calls, unlike diluted earnings per share, there is not an established accounting protocol for determining the 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.
With our stock price trading significantly higher than the conversion price and the conversion price significantly below reported book value per share, potential further reduction in book value per share from conversions or retirements of our convertible notes could be meaningful. At December 31, 2013, the aggregate principal amount of convertible notes outstanding was $160 million and we had $206 million of net proceeds remaining from the $400 million July 2013 senior notes offering, which we intend to use for retirement of these obligations.
The form and timing of any such activity will be dependent upon market conditions and other factors, and there can be no assurance that any such transactions can be completed prior to the December 2014 call date for the 5 1/4% convertible notes or the September 2015 maturity date for the 3 1/2% convertible notes. Our RBC at the year end was estimated at 344%, up from 333% 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.
Before I speak to sales and production, I'd like to make a few comments about the value proposition of our products. As you heard briefly in John's remarks, this value proposition was evident again in the fourth quarter.
The annual index credit posted in the fourth quarter to policies with anniversaries in the quarter averaged 6.57% with the maximum index credit for any one strategy of 21.72%. So this extends the string of better-than-average annual index credits to 7 quarters.
For all of 2013, the average index credit was 5.73% and the maximum credit was that from the fourth quarter of 21.72%. Approximately 43% of the annual index credits posted exceeded 6%.
Approximately 75% of the annual index credits exceeded 4%. And approximately 88% of the annual index credits exceeded 3%.
So not too shabby for a safe money retirement vehicle. Fourth quarter sales were $1.093 billion, up slightly over the third quarter by 3.8%.
Fourth -- the fourth quarter was our third consecutive billion-dollar quarter since our record-breaking year of 2011. It was also our second best quarter for the year, in part due to a short commission incentive that we held during the quarter.
Several of our competitors had incentives, so we decided we needed to introduce our own to retain some market share for the quarter. The problem with a sales incentive during the fourth quarter, combined with the holidays, is that January starts with a relatively empty sales pipeline.
Our pending count was around 3,100 for the fourth quarter and bottomed out in mid-January at 2,277, but has since rebounded to 2,546 today. The nasty weather in the Southeast and the South has hampered sales a little bit.
They have had a rough winter out there, and we've heard of counts from producers from several canceled works option and appointments due to the weather conditions. Sales for 2013 were $4.2 billion, up from the $3.9 billion in 2012, that's a 6.7% increase.
This is our third best year in the history of the company, behind 2010 and 2011. 2013 was busy year as we introduced multiple policyholder benefits, modified and added products and ran 2 different sales incentive programs.
The competition was more aggressive in 2013 than it has been for a long time, probably since before the financial crisis. While the competition may be tough, the American Equity is doing very well.
We enjoy a very good reputation in the marketplace for being consistent and for having very competitive, transparent products, a high quality asset portfolio and the best service in the industry. Through the first 9 months of 2013, the last data available, American Equity was firmly ranked #3 in FIA sales, a ranking that we've enjoyed since 2007.
Our FIA sales were up 16% in the first 9 months of 2013 compared to the first 9 months of 2012. And our market share was 11%, which is about where it's been for the last couple of years.
Our goal is to maintain and increase our market share and rise with the tide as the FIA market continues to grow. Many of our traditional competitors' market shares have been declining over the last couple of years.
The Guggenheim-owned companies continue to grow their market share. Switching to progress at Eagle Life.
We finished 2013 with over $21 million in sales. For the month of January of this year, we're already at $4.8 million.
In the fourth quarter, we signed up 3 new broker-dealers and had 2 recommit. We also signed up 1 bank.
And so in total, we have 9 broker-dealers and 1 bank. The timeframe for getting selling agreements inked to the first annuity application, we're finding, takes a little longer in this distribution channel.
We have a lot of activity going on, however, in the Eagle Life distribution. Our story of clean products and great service is resonating at Eagle Life.
So we look forward to reporting ever -- even better sales results in the future. We finished the year with 1,044 Gold Eagle members, an increase of 10% over 2012.
Our Gold Eagle count is an important bellwether for us as sales trends follow the Gold Eagle trends. To refresh your memory, a Gold Eagle agent is an agent who writes at least $1 million and paid annuity premium during the calendar year.
We pay extra close attention to these producers as it's much easier to market to and build relationships with a known smaller group of producers rather than trying to engage our total agency force of 27,000 agents. These 1,044 producers were responsible for 61% of our total production, an all-time high.
We were also able to retain 67% of our Gold Eagle producers from 2012. Our average retention rate over the last 6 years is 61%.
So our efforts of focusing on the Gold Eagle members is continuing to pay dividends. One of the interesting statistics from our Gold Eagle program is that we have greater success in retaining our bigger producers.
For example, our retention rate for producers who wrote between $1 million and $2 million the previous year was 54%. While our retention rate for producers who wrote between $2 million and $3 million, that one jumped to 77%.
And it jumped again to 88% for those who wrote between $3 million and $4 million. So our retention just continues to go up for the higher volume producers.
Our retention for $10 million-plus producers, 100%. In recognition of this fact, we're modifying the Gold Eagle program for 2014 by providing more benefits for our producers to write $2 million-plus.
One of the benefits will be the award of unvested restricted American equity stock. This will be an exchange for the stock options that we have been offering to this point.
They can vest the stock over 5 years by continuing to be a Gold Eagle number, and they also receive some additional marketing dollars. We really think this modification will encourage producers who write less than $2 million to write more.
And we also think it will further improve our retention rates. Our Gold Eagle program is truly a one of a kind.
We know of no other company that offers ownership opportunities to their agency force. On January 10 of this year, A.M.
Best affirmed our A- Excellent rating, financial strength rating and stable outlook. In their rationale, they cited among other things, American Equity's formidable market position and long track record in the fixed index annuity marketplace, our consistently favorable premiums, earnings results and adequate risk-adjusted capitalization.
We are optimistic about 2014. We feel the FIA market will continue to grow and we plan to go with it.
We introduced a new premium bonus FIA product that we think will be well received and it's available in states that's difficult to get premium bonus products approved. We also introduced 2 new indexing strategies last week.
And we'll be introducing a new income calculator in March, which we're very excited about. Plus, we will have our annual Gold Eagle producer forum in March, where we'll bring together 500 producers and marketing companies to hear our message and strengthen those relationships.
We continue our very unique client appreciation events, which we started doing in June 2010. This is where our home office team travels to major cities in the U.S.
and gathers with our policyholders and Gold Eagle producers for a special lunch. We talk about our history, our rock solid financials and ABCs of fixed annuities.
But the most important thing we do is we say thank you. We thank them for entrusting us with their money, and we give them that reassurance that we're going to take good care of their money.
Earlier this week, we held our 74th and 75th events in Southern California, where we had 500 policyholders in attendance. Since the beginning, we've hosted nearly 15,000 policyholders.
Finally, I came across an interesting article in the February issue of Best Review. It's a publication by A.M.
Best company. It said insurers delivering a better customer service experience can outperform their competitors.
The background said that frequently, insurers promise one kind of experience, but then deliver something different from what their customers expect. They talk about a survey where nearly 2/3 of customers said it was very important for their insurer to provide clear and easy to understand information on their policies, but only 27% of the respondents said that they were very satisfied with their insurer's efforts to do so.
They said what needs to happen? Insurers must transition from a product-driven to a customer-centric operating model.
This certainly wasn't news to American Equity, and it's something that we've been doing from the very beginning and we're going to continue to do for the foreseeable future. So with that, that concludes my report.
And I'm going to turn it back over to John.
John Michael Matovina
Thank you, Ron. To wrap up here, as Dave Noble said in our earnings release, our fourth quarter financial performance capped off a year in which our net income and operating income, as well the related diluted per share amounts, were record highs.
2013 was a year during which we delivered 14% growth in policyholder funds under management, sustained a double-digit operating return on average equity, and increased the cushion of our targeted regulatory capital ratio or RBC. We achieved those outcomes while conservatively managing our risks and financial profile.
We are well-positioned to continue to capitalize on the growing demand for retirement savings and income products. And we expect our invested assets and earnings to continue to grow in the periods ahead.
Looking at 2014, our goals fairly comparable to many of our 2013 achievements. Specifically, we want to grow our invested assets and policyholder funds under management by more than 10%.
And more specifically, we'd like to maintain and build on that $1 billion-plus per quarter sales pace that we've achieved in each of the last 3 quarters and see measurable results or sales from Eagle Life. We want it to continue to generate a double-digit operating return on average equity.
And more specifically here, we'll be implementing additional rate -- renewal rate adjustments to policies with the objective of bringing our spread back up to the 3% target rate. And as we always say, we want to maintain a high-quality investment portfolio with minimal credit loss or risk.
And then finally, we want to improve our financial profile by reducing our debt leverage. Our S&P adjusted debt to capital ratio was just under 26% at year end.
We want to see that much nearer or below 20% by the end of year 2014, and the additional convertible debt retirements will move us that way. So with that, that concludes our prepared remarks.
And we'll open up the line for questions.
Operator
[Operator Instructions] Our first question comes from Steven Schwartz with Raymond James & Associates.
Steven D. Schwartz - Raymond James & Associates, Inc., Research Division
John, I just want to touch on one of the targets from the third quarter, 300 basis point spread. That's still the plan to get there by the fourth quarter of this year?
John Michael Matovina
I would say at this point, we're about a quarter behind schedule, Steven.
Steven D. Schwartz - Raymond James & Associates, Inc., Research Division
Quarter behind schedule, okay. On that topic, can you talk about maybe what you did on renewal crediting rates during the fourth quarter, if anything?
And kind of the expectation for first quarter.
John Michael Matovina
At the moment, there are a modest group of policies that are getting an adjustment for the first time. These are the policies that probably have been -- were issued and renewed, I think, twice at their original crediting rates.
The bulk of the policies are going to -- our big universal policies will start getting adjustments early in the next quarter. And that will be where the bulk of the spread restoration comes from, from that group of policies.
Steven D. Schwartz - Raymond James & Associates, Inc., Research Division
Okay. And then one more for me and then I'll get back in the queue.
RBC, did that benefit from the MEAF and the BlackRock, PIMCO factors?
Ted M. Johnson
It did benefit, that was maybe approximately 4 basis points of the increase. We saw other benefits in RBC from less asset charges this quarter.
We saw some of our securities go up in the rating scale. So that benefited us.
And then we also had a strong increase in regulatory capital from statutory earnings this quarter.
Operator
Our next question comes from Randy Binner with American Equity.
Randy Binner - FBR Capital Markets & Co., Research Division
I'm happy to be a part of American Equity, I guess. This is Randy Binner from FBR.
I just want to follow up on what Schwartz was asking. John, when you said the spread restoration, that's in regard to this hedging issue, right?
Is that what you were referring to?
John Michael Matovina
No. I was referring to additional adjustments to crediting rates on policies.
And a bigger block of policy -- actually, this group has been adjusted once before. And given the declines in yields, we've got to make a further adjustment.
Randy Binner - FBR Capital Markets & Co., Research Division
Okay, so you have a bigger batch coming through there, and then the hedging, the 3 basis points there, is just kind of within the normal range of volatility, is that right?
John Michael Matovina
That's correct. Other than -- as we've got to point it out, we've historically -- I actually look back, we had to go back like 8 or 9 quarters, I think, to find an instance where the last time we had an under-hedged position.
So we've historically been managing that to where it ends up over-hedged. That isn't necessarily good, that's the outcome.
That's -- because if you're over-hedged and the options don't pay off, you've owned an option that you didn't really need in that. But with over-hedging, you don't get the negative surprise, you get the positive surprise in the quarter.
But we have to estimate volumes going by the options. So we're anticipating how many people are going to exit the company in between anniversaries, in which case they don't get an index credit.
And the exits haven't measured up to the expectations that we were -- that we used one year ago.
Randy Binner - FBR Capital Markets & Co., Research Division
All right, understood. And then just on sales, I guess, Ron, I think, you said something like 2,500 or so pending counts at current levels, maybe a little bit lower before that, I missed the exact number.
But that's lower than where you've run in the past. And I guess we've really thought of kind of 3,000 as pending count as the kind of the way to get to $4 billion of sales.
Not that a certain level of annual sales is a goal, but you've been at $4 billion recently. So I guess, the first question is, do you think that the industry is lower because of these weather distortions?
Or do you think this is a function of the PE folks all kind of hitting at once? I mean, should we kind of level set to more like the $3 billion or $4 billion range for this year?
Ronald J. Grensteiner
Well, regarding the weather, I think it would be, there's a lot of consumers and a lot of agents up in the New Jersey, Washington DC, Pennsylvania areas. And now the south is getting hit.
So I would assume that the other companies may be feeling it as well. As far as pending, yes, we're down.
Let's see, what we did I say where we were, we were at 2,546. I compare that to a year ago.
A year ago, we were just over 2,600. So we're not too far off from where we were 1 year ago.
And then I look at, kind of throw in the fact that we had our sales contest in the holidays, everybody had to get reengaged in January. So I'm confident that, that pending will go back up.
We're really looking forward to a good year again this year.
Randy Binner - FBR Capital Markets & Co., Research Division
Okay, and I have one follow-up, and I'm sure there will be other questions. But then I mean, Eagle, is that still something that can -- and I apologize if I missed this in the opening comments, but is that still something that can be material contributor in 2014, maybe $300 million of sales or something like that?
I think that's what management said in the past.
John Michael Matovina
I think what we said, Randy, is we'd like to see $200 million, I think. If we got $500 million, we'd be pretty thrilled with that outcome.
But I think $200 million is a doable number.
Operator
Our next question comes from Mark Hughes with SunTrust.
Mark D. Hughes - SunTrust Robinson Humphrey, Inc., Research Division
The $200 million goal, what's the timing on that?
John Michael Matovina
Full year.
Mark D. Hughes - SunTrust Robinson Humphrey, Inc., Research Division
For full year 2014?
John Michael Matovina
Yes, and I would be hesitant to project what kind of pace it might be. When Ron said just under $5 million in January, I don't know down road the path, Mark, to how we get to $200 million, but obviously, I would figure that the end of the year is stronger than the beginning.
And so don't know what to say about what an annualized number might be for, say, December or fourth quarter production.
Mark D. Hughes - SunTrust Robinson Humphrey, Inc., Research Division
Right. Presumably higher?
John Michael Matovina
Yes.
Mark D. Hughes - SunTrust Robinson Humphrey, Inc., Research Division
Ron, as you look at this kind of market environment, where you've had a big run-up last year and then you got some volatility here at the start of 2014, interest rates are a little choppy. How does that make you feel about underlying demand?
Is this the time people are looking more for safe money products? Any observations there?
Ronald J. Grensteiner
Well, in the stock market is doing very well as it is, people tend to have short memories sometimes on what can happen if there's a big correction. So I think sales would be more robust if the stock market wasn't as high as high it is.
On the other hand, as the baby boomers start to retire and they're looking for that safe money alternative, fixed indexed annuity is a certainly good choice. And we've been seeing some good articles about FIAs, President Obama in his State of the Union talked about his My IRA (sic) [myRA], which it wasn't talking specifically about us.
But I think it was a good signal that even Washington, DC, says, "hey, you guys need to save some money." And FIAs are a great source where they can do that and avoid the bureaucratic red tape.
Mark D. Hughes - SunTrust Robinson Humphrey, Inc., Research Division
And Ron, could you give us maybe a little more detail on the competition, in what form it's taking? Higher commissions?
Higher, more attractive product design? How much more active would you say some of those players are now versus 6 months ago?
Just a little more detail.
Ronald J. Grensteiner
Well at this time of the year, competition usually is a little bit more aggressive. There's some companies that I call in-and-outers.
They get in the market in the first quarter with a high rate or some kind of commission incentive. They kind of steal some market share.
And then the second half of the year, we never hear from them again or they pull back to where everybody else is. And we always expect that.
And I think that's the case with a couple of companies. We know one company announced a commission bonus of 1% here just recently.
So that tends to get agents' attention. I think one of the other trends that we see happening that is getting the attention of some agents are indexes that they tout as uncapped strategies.
And they are really not uncapped. They are capped, it's just the insurance company manipulating the indexing strategy on the inside and they're charging a spread for it.
But we see some agents kind of migrating that way. We're looking at those kind of strategies also, but we really want to stick to our core principles of offering simple, transparent products or strategies.
And some of the strategies that we see out there, we don't think they're very transparent. So that's probably between the in and outers getting, wanting some market share and some of these non-transparent strategies, those are probably the 2 headwinds that we have for the start of the year.
Operator
Our next question comes from Ed Shields with Sandler O'Neill.
Edward Shields - Sandler O'Neill + Partners, L.P., Research Division
Ron, I think you mentioned rolling out a couple of new index strategies, could you go in a little bit more detail on that?
Ronald J. Grensteiner
I can. There's 2 new strategies that we just introduced.
One is not new to the industry. It's called the trigger performance method, and it's about the simplest indexing strategy that you can possibly have.
Basically, what it says if the S&P 500 is positive, they get a fixed rate of 2.5%. So if the market, if the S&P goes up 0.1%, they get 2.5%.
If they goes up 0.2%, they get 2.5%, but if they goes up 1%, they get 2.5%. So any positive movement generates a 2.5% rate.
And we really think that as interest rates start to go up, and we have the ability to increase caps and participation rates. We think that will become more attractive because it's so darn easy to understand.
The other one, we think that we're probably one of the first companies to have. I call it an inverse bond strategy in that it's a strategy that's tied to the 10-year treasury, but in reverse.
We have -- in all of our products, we have of course our S&P and our Dow strategies, which were equity linked. We have our 10-year treasury bond strategy, which is tied to the 10-year strategy -- or 10 year treasury.
So when interest rates go down, that performs, and then we have our fixed strategy. This inverse bond yield will perform when interest rates go up.
And so we really feel like we have our bases covered. That's one of the roadblocks for a lot of people to get into an FIA, as they say "what you're going to do when interest rates go up?"
Well now we have a strategy that will perform when interest rates go up. And it's tied to the 10-year treasury.
Operator
[Operator Instructions] Our next question comes from Mark Finkelstein with Evercore.
A. Mark Finkelstein - Evercore Partners Inc., Research Division
I guess, just thinking about the spread restoration, going back to that topic. You had said that target to get 300 basis points by year end '14, you've articulated that it's an area under your control.
I guess I'm just curious, what has changed that is requiring that to be pushed out a quarter?
John Michael Matovina
Just haven't gotten it implemented yet.
A. Mark Finkelstein - Evercore Partners Inc., Research Division
Okay. And I guess in thinking about the pass back, you talked about a chunky set of renewals that you could reprice earlier in the year.
But how, just on a quarterly basis, should we think about that path?
John Michael Matovina
[Audio Gap] one of the adjustments, Mark, will kick in over the course of a full year period. So the approach would be a big block of policies.
Why I was hesitating is to figure out if I had anything to say about the distribution of the anniversaries. But I don't -- we don't know what necessarily that distribution is to know if it's skewed more toward second quarter or third quarter.
Although historically, our bigger -- second quarter is typically been a pretty high production quarter. Third quarter can be, but not, I guess, not as regular as the second quarter.
First quarter is typically a fairly low, typically the lowest quarter of the year, I guess I'd have to say, because of some of the factors Ron described.
A. Mark Finkelstein - Evercore Partners Inc., Research Division
Okay. I guess, maybe just going back to the first question, I'm sorry.
Was there anything in the market, or any other reasons that's causing you to have not, I guess, started that process a little bit earlier? Is there anything you were seeing that you didn't want to do?
Whether it competitive landscape? Whether it's kind of the move in rates or anything?
John Michael Matovina
No. There's nothing like that.
A. Mark Finkelstein - Evercore Partners Inc., Research Division
Okay. My final question is, you talked about changing the comp structure to agents, unrestricted stock from options, more marketing dollars.
How does that affect the all-in economics in terms of the cost of a unit sale, if at all?
Ted M. Johnson
The all-in economics stayed fairly similar to what they've been in previous years. It's just really a structure change from a stock option to a restricted stock.
Ronald J. Grensteiner
Also, what we did on that is, previously, if they wrote $1 million dollars, they did get some stock options and some marketing money. But due to that low retention rate that I spoke to, we raised the bar on that.
So they now have to do $2 million to get marketing money and the restricted stock. So we basically took the savings from the $1 million to $2 million level and gave it to our more persistent producers.
A. Mark Finkelstein - Evercore Partners Inc., Research Division
Okay. That makes sense.
John Michael Matovina
Bigger picture on that, our product pricing for years has had, in addition to the stated commissions for each product, a 1% marketing allowance, we call it, which is under our control as to how we spend it. A lot of it goes to incentive compensation to the NMOs, some of it goes to the Gold Eagle program.
So the changes we made are all within the confines of that 1% and not spending any more than that.
Operator
We now have a follow-up question from Steven Schwartz.
Steven D. Schwartz - Raymond James & Associates, Inc., Research Division
Just a couple more. Ted, you mentioned what your new money investment rate was in the quarter.
What was the cost of new money? Yes, what was the cost of new money in the quarter?
Ted M. Johnson
The new money?
Steven D. Schwartz - Raymond James & Associates, Inc., Research Division
Yes, on new sales?
John Michael Matovina
It's got to be down in the 150-ish range. I mean, the fixed rates are 135 and 150 for our 2 main product types, the bulk of our products, and the options are a little bit more than that in terms -- or the weighted average cost of the index strategies is a little bit more than that.
But -- so it might be 150 to 160. And quite frankly, I just haven't looked at the report in a while to see the number, Steven.
Steven D. Schwartz - Raymond James & Associates, Inc., Research Division
So that would -- given the numbers that Ted talked about, let's assume that's accurate. And at least on new business, you're very close to that 300 basis points.
That's what it sounds like.
John Michael Matovina
Yes.
Ted M. Johnson
Yes.
Steven D. Schwartz - Raymond James & Associates, Inc., Research Division
Okay. And I don't know if Jeff is there or anybody knows, but...
Ronald J. Grensteiner
He's here.
Steven D. Schwartz - Raymond James & Associates, Inc., Research Division
Jeff, with the decline in rates, how did January look?
Jeffrey D. Lorenzen
Looks very similar to what we saw in the fourth quarter thus far.
Steven D. Schwartz - Raymond James & Associates, Inc., Research Division
Okay, so no real change there. And then one last one on this topic.
What's the -- Ted usually give this number. I don't think you did, but the space that you had, the average space that you have to lower the cost of money above the MGIR?
Ted M. Johnson
Checking here. I believe it's 57 basis points.
John Michael Matovina
That's the fixed.
Ted M. Johnson
Fixed is 57.
John Michael Matovina
62.
Ted M. Johnson
The other one is 62.
Operator
We have no further questions. I would now like to turn the call back over to Julie LaFollette.
Please proceed.
Julie L. LaFollette
Thank you for 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
This concludes today's conference. You may now disconnect.
Have a great day.