Nov 7, 2014
Executives
Julie LaFollette - Director, Investor Relations John Matovina - President and Chief Executive Officer Ted Johnson - Chief Financial Officer and Treasurer Ronald Grensteiner - President, American Equity Investment Life Insurance Company
Analysts
Randy Binner - FBR Capital Markets Mark Hughe - SunTrust Steven Schwartz - Raymond James & Associates
Operator
Good day, ladies and gentlemen, and welcome to American Equity Investment Life Holding Company's third quarter 2014 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 LaFollette
Good morning, and welcome to American Equity Investment Life Holding Company's conference call to discuss third quarter 2014 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 Matovina
Thank you, Julie, and good morning, everyone. If you hear some cracks in our voice this morning, everybody at American Equity seems to fighting flus and colds at this time of season.
But let's move on to the call. Considering the challenging conditions in our business, we are pleased with our third quarter financial results, which kept us on track to achieve our goals of growing invested assets and policyholder funds under management by more than 10%, and delivering a double-digit operating return on average equity.
Looking at some of the highlights for the third quarter results. Our operating earnings per share, exclusive of the impact of the non-trendable unlocking items, grew 10% year-over-year and we generated operated earnings of $0.55 per share before the DAC unlocking benefit.
This was a very solid performance considering our higher stock price contributed to an almost 7% increase in our diluted share count. And these earnings, exclusive of the DAC unlocking, represent a return on average equity of 12% on the trailing 12-month basis.
Although low interest rates remain a headwind, we widened our spread by 12 basis points compared to last quarter, with 6 basis points attributable to an increase in the average yield on invested assets and the other 6 basis points attributable to a decline in the cost of money. We were able to increase the average yield on invested assets, because non-trendable fee income from certain bond transactions substantially offset the drag on investment yield from holding cash and short-term investments above normal operating levels for much of the quarter.
The decline in the cost of money was attributable to ongoing reductions in rates to policyholders and a slightly larger over hedging benefit. The investing in competitive environments remain challenging, and we caution that our spread success ultimately depends on finding attractive investments with acceptable yields combined with the appropriate management of rates to our policyholders.
Our attractive product attributes and excellent customer service culture enabled us to exceed $1 billion in sales again this quarter. The three initiatives we announced last quarter contributed to the sales outcome and are helping us sustain our leadership position in the fixed index annuity business.
Ron's remarks will include further details on the market's response to those initiatives as well as his usual commentary about sales in the competitive environment. So now, let me turn the call over to Ted Johnson, for more detailed comments on our third quarter financial results.
Ted Johnson
Thank you, John. Our operating income of $64 million for the quarter was 7% higher than third quarter 2013 operating income.
The related per share amounts were essentially flat at $0.81 versus $0.80, but the diluted share count for the quarter was 6.6% higher than the third quarter of 2013. The increase in diluted share count equates to approximately $0.05 per share.
The increase in diluted shares results from shares issued since the third quarter of 2013 for retirement of convertible notes and exercise the stock options, and increase dilution from convertible notes, warrants and stock options, because our common stock price was higher during this quarter compared to the third quarter of 2013. Operating income for the quarter, excluding the impact of unlocking, was $43.8 million or $0.55 per diluted share compared to $37.4 million or $0.50 per diluted share for the third quarter of 2013.
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 indexed annuity embedded derivative liabilities to be consistent with the changes to DAC and our lifetime income benefit riders, but that outcome is not relevant to analysis of operating income.
Investment spread for the third quarter was 2.82% and total invested assets at the end of the quarter were $34.6 billion. The spread result was 12 basis points more than previous quarter spread of 270 basis points.
Spread performance was impacted by average yield on investments, which increased 6 basis points to 4.89% from 4.83% in the second quarter. Much of this increase was due to make-whole consent fees from two bond calls, which together with certain prepayment income added 7 basis points to the average yield on invested assets for the quarter compared to 1 basis point for such items last quarter.
Cash and short-term investments were above normal operating levels for much of the third quarter, but returned to normal operating levels by the end of the quarter. The average balance for excess cash and short-term investments for the quarter was $656 million compared to $618 million in the second quarter.
The average yield on invested assets also continue to be impacted by investment of new premiums and portfolio cash flows at rates below the portfolio rate. The average yield on fixed income securities purchased and commercial mortgage loans funded during the quarter was 4.14% compared to 4.15% and 4.39% in the second and first quarters.
The aggregate cost of money for annuity liabilities was 2.07% in the third quarter compared to 2.13% in the second quarter. The company continued to reduce its cost of money through lower crediting rates, and the 6 basis points reduction in the aggregate cost of money also befitted from improved hedging results.
We were 5 basis points over hedged this quarter and 3 basis points over hedged in the second quarter. The hedging results for the past two quarters are consistent with our historical experience of managing the hedging process toward an over hedged outcome.
Renewal rate reductions were a significant component of the 4 basis point reduction in the cost of money, exclusive of the hedging outcome. We have been implementing renewal rate adjustments to small groups of policies for some time now.
Policies in the third quarter of 2011 were adjusted this quarter for the first time since their issue date and certain policies issued in the third quarter of 2010 were adjusted for the second time since their issue date. In addition, as reported in our first quarter earnings call, during the second quarter we initiated additional renewal rate reductions for policies issued prior to July 20, 2010.
These rate reductions will occur on policy anniversary date over a 15-month period that began on April 14, 2014, with the majority of the rate reduction completed by May 15, 2015. Certain new money rates were modestly reduced in October.
This represents the first changes to new money rates since we increased them in the third quarter last year in response to rising investment yields at that time. While we have been reluctant to produce new money rates this year for competitive reasons, we are aware of our spread and return on average equity objectives.
We do not expect that the recent new money rate reeducations to impact our sales momentum. We will continue to monitor the competitive environment and make further adjustments to new money rates based upon changes and market conditions.
We did not have any convertible debt transaction this quarter, but we did retired $23.1 million of the 3.5% convertible notes last week, and intend to call and retire the remaining $32.1 million of the 5.25% convertible notes in December. With these retirements, we will end this year with no more than $22.4 million of the 3.5% convertible notes outstanding.
The total consideration paid to retire the $23 million of the 3.5% notes last week included $30 million of cash and 618,391 shares of our common stock. At November 1, 2014, we had $66.5 million of net proceeds remaining from the July 2013 senior notes offering.
We intend to use these net proceeds to redeem or repurchase the $32.1 million principal amount of the 5.25% notes and $22.4 million principal amount of the 3.5% convertible notes that remain outstanding. The form and timing of any such activity for the 3.5% convertible notes will be dependent upon market conditions and other factors, and there can be no assurance that any transactions can be completed prior to September 2015, the maturity date for the 3.5% convertible notes.
Our Board of Directors has approved an amendment to the indenture for the 5.25% convertible notes. This amendment provides that holders of the 5.25% convertible notes may elect to receive the conversion value of their notes entirely in cash.
To the extent, holders make the selection when they convert their notes in response to the call redemption notice later this quarter. We will issue fewer shares to retire those notes and reduce the dilutive effect of the conversions.
This effectively is a form of a stock repurchase program. S&P completed their annual update review and published updated rating commentary on us on October 22.
Our S&P ratings remain on positive outlook. One element of the positive outlook has been reduction of our debt leverage and reducing our adjusted debt to capital ratio to below 20%.
This will help facilitate an upgrade in our ratings from S&P. The convertible debt retirements have contributed to reductions in our S&P adjusted debt to capital ratio, which declined from 25.8% at yearend 2013 to 22.1% at the end of this quarter, and it will be much near or below 20% by the end of this year.
Our RBC is estimated to be at 359% at the end of the quarter, which is up from 356% last quarter and 344% at the end of 2013. We remain comfortably above the 300% ratings thresholds from A.M.
Best and we have adequate regulatory capital to support much larger sales volumes than what we are currently experiencing. With that, I'll turn the call over to Ron to talk about sales and production.
Ronald Grensteiner
Thank you, Ted. Good morning, everyone.
Before I comment on sales and marketing, I'd like to reconfirm the value proposition of our products. Policyholders who had a contract anniversary during the third quarter had an average annual index credit of 6.47% and the highest index credit for the quarter was almost 18%.
This outcome extended the strength to nine quarters, where we credited a better than average annual index credit and we consider better than average to be 4% or higher. So far this year, 46% of the index credits were at least 6% or more and 91% were at least 3%.
In addition to growing retirement savings at a low risk level, another very important feature of fixed index annuities is guaranteed income. With the demise of defined benefit plans and a huge wave of consumers getting ready to retire, our products are only becoming more desirable, as a retirement vehicle that provides guaranteed income and a paycheck for life.
This is why we're still optimistic about our future as a market leader in the fixed indexed annuity space. As far as sales goes, third quarter sales were $1.07 billion compared to $1.04 billion in the second quarter and $1.05 billion in the third quarter of 2013.
Our pending count for much of the third quarter fluctuated between 2,700 and 3,050. However, the average daily pending count in September and October was above 3,000, and we've averaged above 3,200 for the last 10 days.
Our pending count today is 3,264. We feel pretty good about our progress.
However, as Dave Noble always says, we're happy, but not satisfied. There are some factors that are certainly helping our momentum.
First, it is fall; activity usually picks up pretty good between Labor Day and Thanksgiving. And also the initiatives that we introduced in August are certainly helping us to sustain our leadership in the marketplace.
The first initiative was our S&P Aristocrat volatility control index, and that is gaining more and more traction each month. In October, it was our fourth, the most popular strategy, was nearly 11% of the premiums going into that strategy.
The second initiative that we talked about was a gender-based payout factors for our lifetime income benefit rider. We were the first company to introduce gender-based payout factors, and this allows us to be more competitive and precise on our individual income.
It also gave us an opportunity to make some adjustments to our joint payout factors, which were too high. We did get some pushback from producers on the lower joint factors.
But in reality, when it comes to time to start income, our experience has been that the consumer chooses the higher individual payouts to generate more income. The other initiative that we introduced in August is commission Option U.
This pays a lower total commission, but pays it all upfront. Our current commission structure Option A, pay 75% of the commissions upfront and 12.5% at the 13 month and another 12.5% at the 25 month.
While it was very popular with our current producers, Option A was actually a deterrent for newer producers, and hence the reason we introduced Option U. In October, 86% of the applications indicated commission Option A; and 11% shows the new option, Option U; and the remaining 3% chose Option B, which is trail commission.
Another factor for increased momentum, as some of our agents are starting to come home to American Equity. We've had agents tell us that they miss our best-in-class service and our consistency.
As an example, we had our annual convention last week, where we had 200 producers, representing $1 billion in premium in attendance. And if I heard it once, I heard it a 100 times and how much they appreciate American Equity's culture and service.
It was very gratifying. We have also heard some producers make comments about our consistency.
It seems some of them are getting a bit disenchanted with multiple rate changes and procedure changes by some of our competitors. And certainly, isn't the first time that producers left to sell the next hot product, only to find out things aren't as they appear, and eventually we win most of them back to American Equity.
And consistent we are. According to Wink's American Equity still firmly ranks number three in FIA sales as of the second quarter, the latest data available and we are ranked number three in all-time FIA sales.
Since they have been tracking FIA sales, we have been ranked in the top five, 58 out of 62 quarters, that's 15-plus years of consistency. Well, it's been a couple of quarters since I spoke about the client appreciation events.
We're still holding them, and since inception, have had 87 events with over 18,000 policyholders in attendance. To put this in the perspective 18,000 policyholders with an average fund value size of 65,000 equates to over $1.1 billion in annuity fund value.
As a quick refresher, this is where we invite policyholders and their agents to luncheon, where they can hear first hand from American Equity executives about our business philosophies, get a high level view of our financials and fixed annuity basics, but our most important message is to say thank you, and just basically say thank you for entrusting us with the retirement money. My commentary just doesn't do these events justice, it's one of those you have experience it to appreciate it.
Turing to Eagle Life for a moment. Sales in the first nine months of this year were $66 million compared to $22 million in the first nine months of last year.
We should hit $100 million for 2014; decent progress for a long-term initiative. To date we have 25 selling agreements in place.
I was recently on the road touring and visiting Eagle Life broker dealers and banks and came home very encouraged about our growth opportunities in this channel. Consumers in this channel want exactly the same benefits as the consumers in the independent channel and that's principal protection, guaranteed interest, and a paycheck for life.
American Equity is also making some inroads into the B-D channel and we've already have one promising relationship of significant size. Switching gears for a moment, you've heard me on previous calls talk about our competitors who market volatility control index strategies and they market them as uncapped.
We have lost some market share to these companies, and we have refused to use the term uncapped in our marketing of our volatility control index. We think it's potentially misleading and sets unrealistic index credit expectations.
This past quarter, the Iowa Insurance Division sent out Bulletin 14-02, which supports American Equity's view on uncapped strategies as well as the use of hypothetical illustrations, which could also lead to unrealistic expectations. So will this change the landscape?
Really don't know. We believe so, but it will take time.
Finally, a new report from Cogent Reports was released in September, which listed American Equity with the highest Asset Investment Momentum score among insurance agents. They surveyed 870 life insurance agents and financial advisors this summer, and Asset Investment Momentum is determined by measuring likely inflows at the provider level, by product type, and outflows over the next six months.
One of the quotes in the release said, among fixed indexed annuity providers, the most revered providers stand out for demonstrating a high level of integrity and honesty and exhibiting a depth of understanding and commitment to the continued success of producers in this market. So a very positive quote.
We're not sure if this will come to fruition, but they did interview a good number of producers, and we'll take all the press we can get, the positive for us we can get that at. So with that, that concludes my report.
And I'll turn the call back over to John.
John Matovina
Thank you, Ron and Ted. With our best-in-class service culture, competitive products and capital strength, American Equity has built a strong foundation for future growth.
That foundation is a result of the extraordinary commitment that each of our 425-plus employees brings to our office each day. And this foundation will enable us to capture many opportunities for growth in the years ahead.
We are selling retirement savings and retirement income products to an ever-growing market and the ageing baby boomers need the security that our principal-protected, fixed index annuity products provide. For the current generation most of whom do not have access to a defined benefit pension plan, annuities are the only financial instrument that can provide them with a guaranteed paycheck for life and retirement.
American Equity remains well-positioned to continue to capitalize on the growing demand for retirement savings and retirement income products. So that concludes our prepared remarks.
And as usual, we're happy to entertain any questions.
Operator
(Operator Instructions) The first question comes from with the line of Randy Binner from FBR Capital Markets.
Randy Binner - FBR Capital Markets
I just have a couple. One is on the DAC unlock.
I guess, I'd be interested in parsing out the main good guys and bad guys in that. Ted, I think I heard you mention that there was an adjustment in there for lifetime benefit riders, so could you kind of click off the good guy that you got from the account value true-up, so more assets out there, as well as the headwind, I guess, from the interest-rate assumption change, and then whatever the benefit rider change was, if I heard that correctly?
I'd just be interested in understanding the pluses and minuses within the overall DAC unlock.
Ted Johnson
Well, overall in DAC unlocking the biggest driver of it was a positive effect related to account value true-up. Actual account value exceeded what was projected in the model and we needed to make adjustments for that.
And the main reason for that is, and we've kind of had this in prior years also, in periods of time where we have very strong index growth, our actual account values will grow faster than what's projected in the model. The model has a projection in it that has a level of index growth projected in it, but there can be times where both actual can exceed or be lower than what the model has.
We've had very strong index credits throughout the past 12 months and so that has led actual account values to be in excess of what the model has and so we trued those up. A negative going the opposite way would be looking at the overall spread environment.
We have lowered our spread assumptions for a period of time in the DAC model until the point in time that we think maybe rates are going to go back up, when you lower spreads in the model that does have a negative effect on that. We also looked at what the ultimate spread would be in the model ultimately and we made some relatively minor adjustments downward related to that.
Now, going to, we do our unlocking process over our DAC and deferred sales inducement model. At the same time, those same assumption changes then need to be moved over and made in our model for calculating our lifetime income benefit reserve.
And we did make those adjustments. And those adjustments resulted in an increase in that reserve, which did somewhat offset some of the positive effects of DAC unlocking.
Randy Binner - FBR Capital Markets
Could you kind of quantify the different pieces then?
Ted Johnson
I tell you, I've got a per share amount. The positive effect of DAC unlocking was approximately $0.36, and the impact on revisions to assumption changes to the lifetime income benefit rider was a negative $0.10, which got us back to on an operating income basis to our net unlocking impact of $0.26.
Randy Binner - FBR Capital Markets
So the $0.10, bad guy. I got you.
And the account true-ups was offset how much by the interest rate impact in the first piece of that and then I guess the $0.36?
Ted Johnson
In looking at just the DAC model, that account value true-up was a $40 million positive. While, the effect of adjusting spreads was a $20 million-some dollar negative.
Randy Binner - FBR Capital Markets
And the spread changed how much for the interest rate assumption?
Ted Johnson
Well, there is two different components of the spread adjustment. One is looking at where we see spreads coming now in the next few quarters in the current low interest rate environment.
And then two there is a concept of what's called the ultimate spread in the model, and we did adjust our ultimate spread in the model down 5 basis points. The other concept I am talking about is that there is a period of time here that we're not expecting to earn our targeted spread, that we have in the model, but we expect over time, as all of us do, and we keep on pushing it out is when rates will go back up and we'll see an expansion of our spread versus the contraction.
Randy Binner - FBR Capital Markets
I am going to stick with this and then I will yield it to the other guys. So I guess with the 5 basis-point reduction, is that idea reliant upon a mean reversion expectation, meaning that you are looking at where interest rates have been in the last few years and saying, yes, they are lower now, but I think they will revert back up based on the mean reversion.
Is that the concept that leads to only a 5% reduction?
Ted Johnson
The concept is ultimately, you think you're going to get back to over the life of those product or the enforced block back to this spread assumption. But you do have another assumption built into the DAC model where in this current period, over the next several quarters and going forward, you're going to be earning something lower than that ultimate spread assumption that you believe you're going to get back to.
Randy Binner - FBR Capital Markets
But I guess, the bottom line in more layman's terms is that as long as you continue to grow and hold account value, that helps protect you from the low interest rate environment as it relates to potential DAC unlocks?
Ted Johnson
Yes. I mean, if we see persistency performance, it's better than what's in the model, that is a positive to the DAC model.
Currently in this low interest rate environment, we continue to see persistency be better than what the model has in it and we make adjustments for that.
Operator
So your next question we have comes from the line of Mark Hughe from SunTrust.
Mark Hughe - SunTrust
That Iowa bulletin, how much impact do you think that will have? I think, you said you believe it will change the landscape.
How quickly, how broad, is everybody going to have to comply with this?
Ronald Grensteiner
Yes. Everybody is going to have to comply with it for sure.
And in Iowa, it's a good point. It's an Iowa bulletin.
However, Iowa is a leader -- the insurance department in Iowa is a leader in the United Sates for setting precedent, so I would not be surprised to see other insurance departments adopt a similar strategy or a similar viewpoint. I guess, from my standpoint, I don't know how long, but I think it will change the landscape somewhat.
As volatility control indexes continue to be marketed and become more popular, I think that there will be more and more awareness of exactly how they work and I think that the tone in marketing will eventually change. And we're doing our part here, as we talk to producers.
We introduced our volatility control index to a group of producers at a luncheon one day, and after we were done, one of the producers raised his hand and said, that's great, but when are you going to introduce one of those uncap strategies. So it's an education process.
Well, ours, it doesn't have a stated cap, but it's a volatility control strategy just like many of the other strategies out there that are being marketed as uncapped, we just choose not to do that. So we think it's a process and it's a learning curve, and they'll eventually come to our way of thinking, and that State of Iowa demands it.
Mark Hughe - SunTrust
This is America. We don't want to be controlled.
We want to be uncapped. How much do you think that uncapped strategy, just that language, has helped in terms of sales?
When you look at the market growth in the first half, it's just tremendous. As you point out, your competitors have been taking share.
How much of that is because of this product, this marketing approach, that's really caught the attention of the distribution and of savers, or would most of that growth have been in place regardless?
Ronald Grensteiner
It's a good question. I wouldn't say it is by itself responsible for the shift to those types of products.
I think there is a variety of factors, along with being marketed as uncapped, I think that using illustrations with back testing that goes back 10, 20 years, has also created some awareness to uncapped, because the uncap strategies perform really, really good, when you do back testing over 20 years. And so I think that's a part of it.
And part of it too, Mark, is as you mentioned and we are believers in that the market is just going to get bigger on its own as the baby boomers retire. So I guess I can't pinpoint exactly how much of it is to uncap, marketing as uncapped, but I'd be willing to say it's a chunk.
Mark Hughe - SunTrust
Ted, on the spread, is there any visibility you've got for 4Q? You obviously had some non-trendable help in the third quarter, but I'm curious if you can take some of these factors and give some insight as to how they might shape up for Q4.
Ted Johnson
Well, what I would point you back to is John's comment that these non-trendable items that we had this quarter basically offset the drag that we had from cash for the quarter. And we were fully invested by the end of the quarter, so we have no expectation of having any drag on net investment income for the fourth quarter.
John Matovina
Other than reinvestments we'd continue at rates below portfolio rates.
Ted Johnson
No drag from excess cash. But yes, there'll be some drag on the overall portfolio yield, because of investing at a lower rate.
Mark Hughe - SunTrust
So steady, some drag from lower yields, presumably some benefit from the continuing to update the crediting rates? Is that fair?
Ted Johnson
Yes. I mean we will continue to see crediting rate, cost of money benefit from the crediting rate adjustments that will continue to flow through, but those won't be completed on that larger block until May of next year.
Mark Hughe - SunTrust
So would it be safe to assume kind of a steady-ish perhaps in fourth quarter?
Ted Johnson
That's going to be depend on one-time items and other things that may happen this quarter.
Mark Hughe - SunTrust
But it's ballpark-ish, but a lot of things can happen?
Ted Johnson
Once again, we don't project out future quarters or make judgment on future performance.
Mark Hughe - SunTrust
On the strategy of adjusting those crediting rates, how far along are we? What percentage of the potential policies, have been adjusted?
If you look sort of at the reasonable universe of what you intend to adjust, how far along are we?
John Matovina
The biggest one is the one that we talked about in the first quarter that kicked off in the second, because that covered policies going back a number of years. And I think this question even came up maybe on the last call too from somebody.
But there is still a fair amount to go, would be my take, because typically our best sales quarters have been second and third often times. So perhaps we're through more than half of it, I guess.
Maybe I better modify my statement, because although we got a little bit of second quarter to go yet. And obviously the first quarter has typically been the slowest quarter for sales that we have each and every year.
So perhaps by the time we get to December through the end of this quarter, we'll be more than 75% through and it might be between 80% and 85% of the impact will have been implemented. But you realize that that also flows through, it just doesn't happen automatically then, because you're still picking up the benefit in the current quarter from what you adjusted last quarter too.
So passing of the anniversary is important for the rate adjustment, but then it flows into the cost of money and continues to impact each quarter after.
Operator
The next question we have comes from the line of Steven Schwartz from Raymond James & Associates.
Steven Schwartz - Raymond James & Associates
John, anything out there in assets that can be put back to you or anything like that that might create some excess cash that you're expecting over the next 15 months?
John Matovina
We're not expecting to see any calls here in the next period of time. We still have about $688 million, which is really our call exposure for future periods, but we're not expecting to, based upon where current rates are, to have both calls happen in the near-term future.
Steven Schwartz - Raymond James & Associates
Ted, well, I have you just following up on kind of Randy's question. The account value true-up and the fact that you've got higher index credits than you would have expected over the last 12 months, is that just plugged into the model or is there some type of quarter approach that you use, that you busted through, or maybe you can give a little more color on that?
Ted Johnson
We only true-up account values when we unlock. It's not part of the AGP, actual growth profits versus EGPs that we true-up every quarter.
We do analyze and we do watch exactly the difference between actual account values versus what the modeled account value is every quarter. And if we would happen to see that go above certain threshold, we would have the possibility that we would unlock in a quarter for that reason outside of third quarter.
We haven't had a period yet where we've seen account values trend up to a point where we've needed to do that. But we only have in the past years, only trued-up our account values once a year, but it is not a quarterly exercise that we do.
John Matovina
One more commentary about that too. If we did true-up account values every quarter like we true-up the estimated AGPs to actual AGPs, it would create a lot of variability, and we'd be talking about unlocking every quarter.
So that's one of the reasons we've kind of chosen to follow the approach that Ted described of monitoring those account values, and only after they've demonstrated a variance outside of tolerance that we move to do the account value true-up and unlocking.
Steven Schwartz - Raymond James & Associates
And then one for Ron. Ron, I think you said Option U was 11% of sales in the quarter?
Is that correct?
Ronald Grensteiner
I think, that's what I said. Yes.
Steven Schwartz - Raymond James & Associates
Do you have a sense -- the point of Option U is to bring in new people. Do you have a sense if it's accomplished that or is this current producers who are choosing something else, or maybe it's too early, I guess?
Ronald Grensteiner
Well, it's perhaps a little bit early, but our recruitment numbers were about the same in the third quarter as they were in the second quarter. So I haven't seen it in the recruitment numbers, but where I haven't looked yet, Steven, but where I perhaps would look is to see if we had any non-producers that started producing after we introduced that option.
So that is an exercise that I'll do for you for our next earnings call.
Operator
The next question we have comes again from the line of Mark Hughe from SunTrust.
Mark Hughe - SunTrust
The pending account that you provided average 3,200 pending, how does that compare versus this last year?
Ronald Grensteiner
That 3,200, Mark, is actually just in the last 10 to 15 days that we've been there. We've averaged 3,000 in September and October.
And last year at this time, it was 3,000. In November of last year it was 3,000.
Mark Hughe - SunTrust
So at least the recent pay seems to be picking up a bit compared to last year.
Ronald Grensteiner
Correct.
Operator
At this time, we have no more questions through. I would now like to turn the call back over to Julie for final remarks.
Julie LaFollette
Thank you for your interest in American Equity and for participating in today's call. Should you have any follow-up questions, please feel free to contact us.
Operator
Thank you for your participation in today's conference. This concludes the presentation.
You may now disconnect. Thank you for joining and enjoy the rest of your day.