Q1 2020 Earnings Call
Metlife Holdings Company first quarter 2020 conference call at this time for opening remarks introductions I would now like to turn the call over to Julie Lafollette coordinator of Investor Relations.
[music] good morning, and welcome to American equity investment like holding companies conference call to discuss first quarter 2020 earnings.
Our earnings release release and financial supplement can be found on our website at www Dot American dosh equity Dot com.
Non-GAAP financial measures discussed on today's call and reconciliations of non-GAAP financial measures to the most comparable GAAP measures can be found in those documents.
As any not today's call or not Bala Chief Executive Officer had Johnson, Chief Financial Officer, and Jeff Lorenz been Chief investment Officer.
During his portion of the call, Jeff Lorenzo and we'll be referring to the investments and capital update slide deck available on our Investor Relations website at Www Dot American dashed equity dotcom.
Please note that all data in this presentation refers to American equity investment life insurance company and Eagle Life Insurance company.
American equity of New York has been excluded.
Some of the comments made during this call may contain forward looking statements within the meaning of the private Securities Litigation Reform Act.
Or a number of risks and uncertainties that could cause actual results to differ materially from those expressed or implied.
Factors that could cause actual results to differ materially are discussed in detail in our most recent filings with the FCC.
An audio replay will be made available on our website shortly after todays call.
It is now my pleasure to introduce not Bala.
Thank you Julie good morning, everyone and thanks for joining us this morning.
This is my close called as Chief Executive Officer of American equity.
Why do any new leader often organization.
Stock without the Doctor I was just to be pandemic and its resulting economic recession.
These uncertain times also that wants to reassess how capability.
And to explore new unique opportunities to further differentiate ourselves to pay off into the marketing.
In March we moved decisively to flush protect our employees and business partners.
And maybe taught operating platform to continue to provide it by industry leading levels of service compliance. We produce is in a prolonged work from home environment.
In Fadiman, we for the life insurance can see balance sheet.
$1.3 billion liquidity.
As of March 31st.
On a pro forma 396% RBC ratio after the affecting a 200 million dollar cabinets contribution from the holding company.
One.
With approximately 95% of the company's 600 and hurt the associates fully functional productively working from home since mid March.
And Oh gosh visibility into the convenience of about $52 billion have invested assets. We are now actively starting to find pockets complete offense in democracy.
Allow me to elaborate.
In early April American equity announced prepayment boss deferred commissions under a stretch commissions program for over 2700 producers to help ballpark mismanaged. It on small business costs like other small businesses in America have stopped false builds to be and doing.
No when they can return to business as usual.
It's a nice to Mediconnect, what do you think $30 million. Its commission earlier, then when became due when they would come due in 2020, passing apron happened Tonight.
It is actually did during such moments of truth.
Further deepen our relationship with producers in the independent agent channel.
This is one of many examples are the Apollo Mediconnect. He has been seen continues to maintain the U.S. loyalty with long established or do you said, especially with million dollars less producers, who number 974 last year.
In the first quarter, 75% of American equity life sales came from these loyal producers.
I can American equity life income shoes, and accessories, she'd Cds with products accounted for 42% and Turkey, 5% to grow seems respectively during the quarter.
Why these two products have been the drivers of seems great. Since the launch in 28 team we are ready for that product refresh.
Additionally, going forward, we've been do more frequent product refreshes, starting with accumulation product portfolio.
The first such refresh we'd be the introduction of outsourced multi asset index strategy in June.
This adds to our distribution partners to get to find solutions. Why did you think the bundled ability of costing money to changes in an implied volatility in the marketplace.
As is the keys for Sun popular new product strategies like plain Vanilla S&P 500, I knew point to point participation rate.
Liability driven investing is key to success in this business.
I think would be 60 acre CEO and I can already should do it is a focus on this team.
But.
We do continue to expand our asset classes I didn't send the August Mike Wood basket Clos Nonaffiliated investment managers.
Got it market and economic conditions provide funding opportunities for this.
Second on a go forward basis, we've been managing investments with the Len, Oh Board, but then Shouldnt ultimate credit losses over the cycle.
Thanks, factoring the cost of incrementally required risk appetite in the bank of ratings downgrade, even if the I think has remote algorithmic mostly like these units.
This approach what exactly would likely have us de prioritized, adding new order due to investment grade crises and structured securities.
In favor of higher rated investment grade branches with more reaping stability or other acid sectors. We agreed to this could just it's great opportunity.
As we manage to a prolonged economic recession, we have an offering with a fortress balance sheet.
Our strategic focus will be on re tooling up capabilities for excellence in eight years of distribution product manufacturing.
Management and capital optimization.
This is intended to drive incremental group of bad you wouldn't revenue by having a sustainable.
Dominant position in the independent agent channel.
Over the next 12 18 months.
Existing gold business is our primary focus.
Refresh capabilities in each of the aforementioned eight years will be the easiest to drive additional growth in Eagle life or I don't know juicy season, Twentytwenty one on data.
Moving on to results for the quarter, Let me start machines, and then we'll get to the finances.
Gross fields of 705 million fell 23% compared to the fourth quarter of 2019, driven by declines in stands at American equity life, I need the life of 23% and 26% respectively.
Well the entering the quarter, we were knocking the golf Fiona competitiveness and I did the accumulation or income markets and the independent agent channel.
Yes, they shouldn't be changes made by competitors during the quarter had bridge that gap in all FIFA and I didn't aristocrats excess return strategy now illustrates particularly bad.
As expected competitors brought down guaranteed income to 11 much go sell through our own as well during the quarter.
In the fourth quarter.
And being average 1500 52 apps at American equity life and currently stands at 1100 in 13.
Bending are you going like averaged 100 in Turkey too.
Got it be stands at 81.
Given the current Qubits 19 situation the much needed limitations on face to face meeting and increase social dispensing requirements.
That's fine lines put us and others in the industry would slow down.
Given the fact that we had to scale player with already $53 billion of policyholder funds under management.
This will be less often in fact or nine.
That's right the new entrants offer doors that had less cost efficient.
For the first quarter was Twentytwenty reported non-GAAP operating earnings up $154 million Dollarssixty seven per share.
Back to $89.4 million or 97 cents per share for the first quarter of 2019.
Even excluding a 31 million dollar or 33 cents, Michelle onetime tax benefit from the enactment of the Kazakh.
This was a record first quarter for the company driven primarily by investment spread and a decline in the amortization of deferred acquisition and scenes inducement call.
Now I'd like to turn the call. It would you Ted for additional comments on first quarter financial results.
Thank you are not.
We had two discrete items this quarter first as a not discussed we recognized 31 million or 33 cents per share onetime tax benefit from the enactment of the carry back which allows net operating lucky create and 2018 through 2020 to be carried back five years for tax.
Surfaces, which includes years in which the tax rate was 35%.
Second we recorded a 2 million pretax or two cents per share loss from the write off on amortized debt issue cost for the subordinated debentures that were redeemed a portion of the proceeds from our perpetual preferred stock issuance last November.
Average yield on invested assets was for 36 in the first quarter at 2020 compared to 452 in the fourth quarter of 2019.
The decrease was primarily attributable to a six basis point reduction in the benefit from non Trendable investment income items and two basis point reductions each from the decline in yields on floating rate investments yields on new money at about <unk> and interest forgone due to the buildup of cash.
The aggregate cost money for annuity liabilities was 172 basis points down three basis points from the fourth quarter up 29 team.
The benefit from over hedging index linked interest obligations was five basis point unchanged from the fourth quarter.
Excluding the benefits from over hedging the decline in the adjusted cost of money reflects a year over year decrease and option costs due to our active renewal rate management.
Investment spread for the first quarter was 264 basis points.
Trendable spread which we define as excluding the impact of additional prepayment income the effective over hedging and other non trendable investment income item was 253 basis points in the first quarter compared to 259 basis points in the fourth quarter at 29 team.
And our analysis of Trendable spread this quarter, we identified four basis points of yield that should have been classified as additional prepayment income for the fourth quarter of 29 team, which have been reclassified in our financial supplement.
The average yield on investments acquired in the quarter with 349 compared to 374 in the fourth quarter of last year.
We purchased 907 million a fixed income securities at a rate of 332 and originated 299 million of commercial mortgage loans at a rate of four all to during the quarter.
Option costs were basically flat sequentially for the first quarter as the actions we began in January to reduce caps and crediting rates on renewal business were offset by a rise in costs of certain options in March as volatility surge.
From a low of 148 basis points for the hedge we ended February 20 said.
Option costs at American equity life Rose to 173 basis points. One month later as the effect of volatility on the relatively small percentage of uncapped S&P 500 annual point to point options, we bought during the quarter more than outweighed the decline in cost of the cloquet options we.
Purchase to hedge our monthly point to point strategies.
Although the cost of options has fallen up that as the equity markets have settled down the cost of options backing our S&P 500, and your point to point participation rate and monthly average strategies remain calm.
Beginning Jim first we will be reducing renewal participation rate on 4.3 billion up policyholder far.
When volatility falls back to February levels, we could begin to unwind these changes.
The yields available to us decrease for the cost of money right. We continue to have the flexibility to reduce our rates if necessary and could decrease our cost of money by roughly 63 basis points, if we reduce current rates to guaranteed minimums.
This is up from 459 basis points, we cited on our fourth quarter call.
Deferred policy acquisition costs and deferred sales inducement amortization decreased by 22 million sequentially in part, reflecting an increase any expected present value what future gross profit following the implementation of the January renewal rate changes.
The increase in the liability for lifetime income benefit riders was 69 million basically flat with the fourth quarter.
Relative to the fourth quarter reserve accretion benefited from lower lifetime income benefit rider utilization in certain cohorts offset by a similar amount due to the renewal rate changes I just mentioned.
In total the net benefit from the January renewal rate changes was approximately 7 million pretax.
If the S&P 504 to remain at current levels, we would expect reserve accretion to be 15 to 20 million greater per quarter for the next several quarters relative to the first quarter all else equal due to expected future minimal growth an account values as it was.
Fault of low index credits.
He estimated risk based capital ratio at American equity life as of March 31st Rose five points from year end two 377%.
Driven by increase in surplus and a decrease in production on a trailing 12 month basis, partially offset by growth in the balance sheet.
On May four we made a 200 million capital contribution to American equity life, bringing the RBC ratio to 396% auto on a pro forma basis.
Now I'll turn the call over to job to discuss our investment portfolio.
Thank you Ted.
Before deep diving into the investment portfolio all comment on the 31 million a realized credit losses in the quarter.
Roughly 29 million came from allowances and write downs of domestic oil drillers.
We have been impairing these issues as credit metrics have continued to be under pressure even prior to the recent downturn in oil prices. The remaining 2 million reflect a smattering of write downs primarily on CMBS.
Now I'd like to take my routine remaining time to touch on the investment capital update at Www Dot American Dash equity Dot com.
I'd like to start by stating that we have a very high quality investment portfolio.
As of March 30, Onest fixed maturity securities were 98% investment grade. According to the any I see we had over 2 billion of net unrealized gains as of April thirtyth.
I'm pages, four through seven or the investment capital uptake, we highlight our corporate bond portfolio.
He is an exceptional credit quality with 98% rated investment grade is broad broadly diversified across credit sectors.
Holdings in what we have identified specifically as coded 19 exposed are quite manageable.
Sub sectors, we focused on our energy Airlines.
In commercial aerospace retail and lodging.
In the energy sector, we have two and a half billion of holdings. The key takeaways here is that we believe 69% of our holdings midstream integrated and refining or not at significant risk upstream segments account for 31% of our exposure, but even here we have to differentiate.
The sub sector, most vulnerable to low oil prices as oilfield services, where we hold less than 15% or 384 million of our energy portfolio.
Speaking specifically to the most vulnerable the onshore offshore drillers, we have just 56 million book value when holdings with an average cost basis, a 45 cents on the dollar par.
The 328 million a book value in oilfield services consist of high quality global names, such as Baker, Hughes, Halliburton and National Oilwell Varco.
Our retail exposure consist primarily of strong brands in E. Commerce enabled credits we tier these in three broad categories tier one is Brandon big box, which make up over 50% of our exposure to retail these names such as Nike Lowe's home depot Costco have some disruption in sales, but for the most part every.
And operational.
Tier two is consumer discretionary include names such as dollar General Walgreens advanced auto diesel see more impact, but also remain operational and open for business.
Tier three as department stores in retailers. These are more risk as most have close storefronts. During this period. However, they have maintained and ecommerce linked to consumers that keeps cash flows active.
Our lodging and leisure exposures are minimal or just a 144 million two credits we own our major lodging brands that have strong name recognition and loyalty while the remaining holdings, our private placements secured by key leisure assets.
In aircraft less or in commercial aerospace, we have 574 million of exposure.
Over one half of our holdings are in enhanced equipment trust certificates or W.P.C.S collateralized by young aircraft, which we have recourse to that so let's see is unable to make its payments we have no direct exposure to the major airlines.
Our commercial aerospace exposure is critical aircraft in engine manufacturers like Boeing and Rolls Royce.
I still feel low exposure is broken down in pages eight to 12 or celo underwriting process is anchored by three key elements strong structural support attractive underlying collateral characteristics and strong manager selection.
Takeaways are that structural enhancements today are significantly better than prior to the great financial crisis. In addition, we review each deal for structural integrity as the chart show we have strong collateral characteristics. Both in terms of below average exposure to cope with 19 expose sectors and higher than market credit ratings of underlying collateral.
In addition, our shilo managers have historically outperformed the industry by a considerable amount, especially in challenging credit markets. The point I'm trying to make tiers that we would expect to do much better than a simple analysis of the credit of the great financial crisis would indicate due to the strength of our underwriting and surveillance process.
In fact, the resiliency of our COO portfolio was quite strong as shown on page 12, we would not expect any losses on her siloed portfolio, even if each annual default rate experienced during the great financial crisis, where 25, 5% hired and realized that it.
It would take a market default rate of 175% of the great financial crisis levels to begin to cause losses in the triple B rated portfolio.
On pages 13 through 18, we do a deep dive into the CMBS portfolio.
Here as well, we're very comfortable with the underwriting of the portfolio and wanted to point out to be significantly curtailed new purchases since 2016.
As we look to our structure is roughly 35% or 1.7 billion is retail oriented properties or retail mall exposure is 741 million or approximately 43% of that retail exposure.
Retail mall exposure is defined as large box anchor and small inline stores.
Other forms of retail exposure include community shopping centers lifestyle centers neighborhood centers power centers single tenant <unk> and specialty retail.
Of our mall exposure nearly 60% is within single asset single borrower S.A.S. bee transactions of high quality top tier malls with strong demographics in attractive valuation metrics mall of America wouldn't be a good example, while these properties have seen temporary closings, we do see these as strong viable assets.
In addition, we have about 500 million of lodging exposure in or CMBS holdings Ltvs are relatively low while the average debt service coverage ratio on the portfolio was over two times, we expect to see pressure on net operating incomes for this sector for the next several months.
Similar to our underwriting philosophy was HEALOS the CMBS portfolio has better credit enhancement in the market and our collateral performance has been strong.
Finally, we have less than 200 million in pay downs before 2022, mitigating refinancing risk during a difficult commercial mortgage loan market.
If we look at page 18, we present to resiliency analyses scenario based on the great financial crisis with 50% loss severity in an additional scenario with added stress on the logic in retail sector.
Our impairment estimates under these scenarios would be 46 million 60 million respectively.
We have a very long successful presence in the commercial mortgage loan markets, we have 3.6 billion or 6.9% of invested assets in high quality, well underwritten commercial mortgage loans all loans, our first mortgage with 81% of our portfolio rated C. M at 19% rated C M.
Most notably we are underweight office and have no exposure to hotels or leisure related properties retail exposure is 34% of the portfolio, but we have no retail mall or big box exposure, it's entirely strip retail grocery anchor.
Many of these still have active tenants such as tax preparers insurance agency and carry out good providers.
In addition, our underwriting focus tends to be in tertiary markets, rather than large m. essays with higher but densities as urban density has been a big driver of the spread of infection tertiary markets are more likely to return to business sooner and important factor for consideration.
On page 21, we show resiliency analysis from which we decreased strip retail property net operating income by 30%.
Our total retail portfolio of 270 loans, only 58 loans with an aggregate balance of 238 million would have the debt service coverage ratio of less than one times, if we revalue the collateral using a 7% cap rate on the stress net operating income.
We estimate that only 15 loans totaling a 113 million would have a debt service coverage ratio of less than 1.0, and a loan to value ratio greater than 100% with a combined collateral shortfall of only $12 million.
In this environment, we are being a strong corporate citizen in working with stress borrowers to provide temporary relief as we help them navigate the impacts of cobot 19.
Well this is a different set of circumstances following the great financial crisis, our worst last year and commercial mortgage loans was just $15 million in 2012 on a portfolio not a smaller than the portfolio we have today.
Finally on page 22, we show estimated capital sensitivity to a 12 to 18 month economic recession, consistent with the federal reserves see CCAR stress test.
Scenario is very much in line and maybe even a little worse, an actual experience during the great financial crisis.
Last modeling was performed by leading third party investments systems for corporate credit CMBS, CLL ABS and other portfolios.
Last modeling on the commercial mortgage loan portfolio was based on historical company loss rates.
Effective ratings migration is based on internal company estimates and reflects the full amount of migration. So there's an extra level of conservatism here.
What we find is a decrease of roughly 75 risk based capital points, mostly stemming from an increase in required capital needed to support ratings migration.
Just to be clear. This is a decline in RBC that would occur over a 12 to 18 month period does not assume statutory operating earnings any capital contributions and any other mitigating management actions. We would of course be actively engaged to minimize this impact.
And with that I'd like to turn the call back to an up.
Thank you Jeff.
Before turning the call over to the alternative for Q any I want to take a few moments to talk about capital.
As you can see from a seasonality was presented by Jeff we have more than enough capital to execute our business strategy through that got an economic storm.
Rating downgrade and some very nice credit losses are inevitable with a 52 billion dollar portfolio geared towards generating investment income.
However, I would reiterate jets, calling that out should we be corporate portfolio skews toward higher quality as you saw from the individual names that we own even in the Corbett 19 expose sector.
We do expect rating downgrade in a portion of our CMBS and CNO books, but expect a much lower level of ultimate ran nice credit loss exceed it.
As dead reference we ended the second quarter and any prolonged period of economic difficulty with an RBC ratio of nearly 400%.
Going forward, we intend to manage the life company enormous economic condition added capital like they shouldn't mebane that is consistent with a full 100% RBC ratio.
And then now we could drift downwards, if necessary to approximately 320% RBC ratio due to either they're nice credit losses.
Okay, then pretty increases in required risk African for ratings migration.
This level is intended to reflect 11 that is consistent with the rating agencies expectations for capital adequacy ratios at different points in the economic cycle.
This implies operating with a peak to trough swinging capital adequacy.
Approximately 70 to 80 points of RBC wed like to Africa is doing what it is supposed to do at the midpoint of the economic cycle.
That is absorbed risk.
As economic activity the coverage over the 12 to 24 months did.
We would expect to grow capital adequacy backdrop did a high 300 August 400% RBC ratio level through a combination of owning.
And balance sheet optimization actions, while continuing to execute well not cool business strategy.
On behalf of my colleagues in the anti American equity team. Thank you for your time and attention. This morning.
Now turning to back out on the call back to the operator for questions.
As a reminder, that star and the number one of your telephone keypad.
Please limit your questions to one question per person again that is star and the number one.
We have comments from the line of Dan Bergman.
Hi, good morning.
I guess first in terms of the sales decline is there any color you can provide on how much.
Related to product competitive embedded in that some pricing versus any drag from covidien social distancing just given the timing of the sales process. Just curious if you saw much of an impact from.
So that's something in mid to late March on first quarter sales.
Any details you can provide on how sales levels look in April and how much.
I looked enabling how much of a drag we might expect going forward in the near term or be great.
Good morning. This is Ron Grensteiner I think thanks for the question Dan I think you know the first quarter result.
Didn't really feel the impact from cold at 19 at that point, yet it wasn't until mid March that.
You know it became a bigger factor so our sales in the first quarter.
We're more I would say due to our competitiveness pre covert 19, we made some changes in the fourth quarter.
In advance of some of our competitor so as an odd mentioned in his comments, we were less competitive in the first quarter, but as our competitors made changes.
Our products were more in line with everybody else.
<unk> going forward you know, it's a tough situation certainly as as a everybody's trying to you know do social distancing lot of people are in some sort of shelter at home.
So it's a tough environment. So I like so hard to say what I'm. The second quarter will look like when I look at the up count.
Today compared to over the last few weeks I'm I'm hopeful that we've kinda reached bottom and Oh, they somewhat stabilized we have a very.
Resilient group of core producers this isn't I talked about that.
The economy starts to open up again hopefully.
There are some of those restrictions will help people get out and get board.
Back more to normal whatever that is at that point.
Got it. Thanks, so much and then maybe just shifting gears a little bit just given the big market move in the first quarter any thoughts or details on how we should be thinking about the outlet for index credits and statutory earnings for the remainder there.
Hi, Dan It had in regard to index credit going forward. If we stay at current levels index credits will will be very low or minimal as we go forward over the next three or four core or the next four quarters in regards to statue.
For a income that will certainly will be a drag on statutory income as we go over that next three to four quarters, the first quarter index credit.
We're fairly strong they averaged about 2.4% because of the first two months or so of good market returns, but that won't repeat itself as we go forward and when he was certainly.
Feel the impact on our level of statutory earnings and growth and organic capital generated from that.
And as a reminder, that star and the number one of your telephone keypad.
Also as a reminder, please limit yourself to one question and one follow up question.
I have any further questions you can come back into the Q.
Our next comment or question comes from the line of Ryan Krueger KBW.
Hi, Thanks, the money.
Yes can you help us think about.
Sources of capital generation, it kind of how how long would you would you.
You yourselves as having to rebuild capital back to a 400% RBC target. If you were in a stress environment and then the the avenues that you that you would likely expect came to us to rebuild capital.
Sure.
Well first of all it'd probably be rebuilding over 12 to 18 month period of time first of all it would start with a level of statutory earnings.
To rebuild it also we would look to capital reinsurance type transactions risk capital transactions to be able to optimize.
The balance sheet.
And then it also in addition to that we do have debt capacity within our current rating of approximately 400 million on some of that could also be our could be issued in the form of preferred stock, where we would get a portion of that would still get a level of equity credit.
Can't give us any sense of normalized capital generation within the within a life subsidiary and sensitivity to two sale.
And the one piece I did we bought for that too is the other pieces the lower amount of sale.
So you will also you know release capital too and he versus didn't again, we do our RBC estimate at each quarter import point in time, using a trailing 12 month sales figure.
So there would be that.
On average if there was a normal statutory operating.
Operating earnings, it's probably going to be around that you know <unk> 300 million 250 million dollar Mark and again, that's also going to do funded time level of sales and other items as we go forward.
Thank you.
Our next comment comes from the line of Erik bass from autonomous.
Hi, Thank you look at results. This year, it's been a clear how powerful the impact can be from changes in your assumptions and amortization rates and I realize that you don't typically review assumptions until the third quarter, but given the significant changes in interest rates equity markets and volatility just talk about what impacted these moves could have.
On assumptions and how that could play into future amortization rich.
But again.
We're assuming.
I'll over a long term period of time over a 20 year reversion period, we're assuming a 20 year treasury rate at 4%, we backed that down Tom or did back that downtime in regards to what what is assumed in our model.
Certainly well be looking we need to look over the long term. We have you know this is just a one quarter one quarter trend, but we also need to see how the market behaves and how that changes our opinion in regards to the grading pattern of ultimately, we're currently and where to our ultimate long term assumption is so certainly yes.
Spend significant movements in the market, but it's been one corridor I think us and just as everybody will be closely watching that and I'm looking at that how that affects our overall long term assumptions.
When we get to unlocking in the third quarter.
Got it well enjoy overall.
As overall remember interest rates are part of that the other side of it is how can we manage the.
The overall spread through adjustments through cost of money also.
Got it that was going to be my.
Other question you mentioned I think 10 to 15 to 20 million dollar drag on earnings I think that for the next couple of quarters from higher reserve accretion.
There's also an ongoing benefit of around 7 million from an experience true up if there are those numbers correct. So then should we think of roughly call. It eight to 13 million drag on earnings sequentially.
Correct.
Okay. Thank you.
And again that is star and the number one of your telephone.
Your next question comes from the line of Paul Pablo thing.
He Morgan.
[noise] I.
The this one's for Ted So I.
I know email does not right mortality risk, but I was curious if he could speak to how you see how you see kobin 19 related excess mortality affecting your results.
You know what would that be positive or negative or neutral and I guess would the enforced seriousness of policies that the death claims matter.
In regard to how mortality.
Oh backs, our book of business under regulatory reserves, we carry quite redundant reserves and those especially ones with the lifetime income benefit rider those reserves exceed the level that would be paid out upon it down.
So there is a slight positive to us in regards to an increase in mortality on our book of business.
[noise] got it.
And then the second question has for.
So just focusing on the steel portfolio short term rates continue to go down I was wondering or do you have any floors. There in place that might mitigate pressure or should we start thinking about their a serve the I guess that's it minimum the library. Its can go to for you guys.
Yes, we do not have floors on but we have floors a zero on the COO. So yeah I think from that standpoint, there's there's no outside hedges that protect us from further declines in my board.
Okay. Thank you.
Our next comment comes from the line of John.
Days from type person.
Thank you what percent of your commercial real estate portfolio was in rental for parents for April 1st in what's your expectation for makers.
We had one.
We have to.
Two tenants are two two loans that are basically non accrual or haven't paid for it for the first of March we are in process right. Now we've got a couple that we haven't we're still too early we're usually takes five to six days to get.
Information back from the servicer. So we're still on the early side of that but we're expecting to have a few people that are.
Unlikely to make that payment and we are working in putting in a plan to allow certain levels of forbearance and deferrals for a period of time here, we're trying to align that with the SBO.
To make sure we're in alignment from an accounting standpoint, and not getting ourselves into a position where we might have a troubled debt restructuring that we would have to incur later, so we're very cautious about the rules and the guidelines that are being established and complying with those but we do anticipate that will command that support.
Some of our borrowers in regard to.
Challenges they may have with tenants, having difficulty paying rent when maybe their doors are closed.
I think I didn't do that point that John to Jeff's point Xenon hi, good morning, everyone.
What's really important on a commercial mortgage loan book as Jeff mentioned in his comments is that we're not in the large.
And I'd say, the being and smaller and it seems you think of lets open density you went off script retail exposure and if we have.
Well actually like to get back to work sooner, who knows how quickly things get back to work, but that's definitely something that's a positive but in our book that we're looking at as we think are forbearance and items like that.
Thank you point my other question.
Is there any way to dimension add from side, maybe first interaction and policy being sold [laughter] dovetails on not being in large Ed.
For work shelters and spaces for people with.
Well this is Ron as far as the time of policy being sold in all the old way you'd have.
Potentially a couple of different appointments one it seem not to get acquainted.
To your fact finding.
Find out where the pain is so to speak again, and then second appointment would be.
You know make your recommendation on how you think you can help and sometimes even a third appointments soda.
The whole process can last from you know two weeks two to four months or not four months four weeks excuse me I'm, that's kind of the old way the new way. These days is I'm a lot of our agents are being successful using.
Presume or virtual Webinars virtual appointments those types of things.
The people that are buying today seem to be.
Serious buyers in that if they're watching some type of webinars or see an ad and Facebook or something like that they're the ones that are maybe apt to take.
Action quicker.
So these days I'm the sales cycle might be a little bit shorter actually then under the old way of course, then you always have to account for if there's a transfer money from one financial institution to us that takes anywhere from.
10 days to four weeks.
Our next common comes from the line of Alec Scott.
<unk>.
Hi, good morning, So apologies if I Miss is on the other beginning of the call, but I just had a high level question about spreads.
You know when we think about you know where you're achieving a new money yields and then on the the cost side.
Some of the volatility that that's in the market and the rating action that you're taking.
Yeah, I guess, even just Directionally, you know where how do you see that playing out in terms of the direction of spreads over the next 12 months.
But it is anywhere that kind of quantify how many bips.
Yeah up or down and that would be version.
Yes.
Alex This is Ted I mean, theres a lot of moving parts right now obviously.
You know yield I think once again, one quarter is not a trend I think we're continuing Jeff and his team are continuing to look for opportunities in place.
To proactively about money and so I think there will be opportunities out there et cetera, and found to be able to put to the money to work that maybe are a little bit more attractive rates and then what we have been doing recently.
Beyond that on the cost to money side, you know we continue to have room to be able to take actions was approximately 63 basis points of room between where current crediting rate.
Our and where our minimum guarantees where based upon the week of April 17th I think was the we used in regards to pricing the options to do that calculation.
So certainly we continue to have flexibility I think both you know in looking for opportunities to invest and how we adjust the dollars in that.
Our spread long term or the spread assumed in the model is to 60.
While our trendable spread.
Was to 53 this quarter again, you know, we always assume there's going to be some level of prepayments impact that's going to be in there. So I think you know again, one quarter not a trend going to continue to look at the opportunities out there both from adjusting our liability costs and also in regards to what we're doing it.
The investment portfolio.
Got it and as I said before ultimately you know, we gotta look out over a long period of time too.
As he as we come to our third quarter and adjust that.
Got it.
Alright, and then.
Second question I had is just on your credit ratings.
Yeah, I think they're generally that a minus at the Opco level right now I think two of the three or a negative outlook.
I appreciate the comments that were made at around the RBC and that they don't just you know look at it at a point in time, but to recycle and so forth. So yeah. I was just interested in how those conversations are going and also just if you can opine on you know the level of ratings that you think you need to be able to maintain to have it not you know.
Pack the sales that you're able to achieve.
Any color on all that would be great.
I think I'll hit I'm talking I'm sure.
I've got to start Ted and then I'll start cutting you chime in.
Alex in terms of the rating agency dialogue.
And.
How we think about things going forward this core business that it in the independent agent channel.
It's one where our reputation and instead of in my prepared comments, 75% of sales came from on oil producers and the million dollar platts.
Category this quarter as well.
That's business ratings are important but reputation.
Equally if not more important.
And we feel that we have the capital to withstand a current ratings and actually if you think of actually diversifying the company beyond our core business, that's where a minus or better ratings over time is our goal and that remain there.
This core business will operate at these rating levels or other rating levels as well.
I answered from that point of view, Ted do you want on something.
No I think just in general you know, obviously just to reiterate ridded reiterate our conversation.
With the rating agencies really kind of mirror, what we said here in the script in regards to period of time to cure any reduction in RBC and what company actions would we take to be able to build capital, which we've already covered on the call.
Yeah, maybe the best way to summarize it we don't feel any pressure to I.E. minus ratings at this point, we feel we have a path to better ratings over time.
And that's been retool this business will have skills that allow us to grow faster and other areas, where and he rating or any minus rating will be more important this business reputation matters. The most.
Got it okay. Thank you.
And again that is star and the number one of your telephone keypad. Your next comment comes from the line of Mark Hughes.
Suntrust.
Thank you.
Ted the additional liver reserve the accretion that 15 to 20 million I think you pointed out that.
Offset by 7 million in the true up did or.
Did the company benefit from the true up in the first quarter.
Yes, yes, we did because the rate as a rate decreases are coming through that's flowing through the models just like they will come through on the policies. They hit their anniversary dates in the second quarter.
Understood and so the marginal impact or sequential impact in the.
In two key would be the niche the additional reserve accretion is that that right.
Extra 50% correct. That's correct because we had we had about averaged 2.4%.
Return or index credit.
This quarter because of the performance of the market over the first couple of months of the year, but obviously not where the market that.
Any going forward over the next multiple quarters.
Index credits are going to be very minimal or or or zero.
And I would run up I think one of the dynamics in the past the been when there was a capital.
With that those certain competitors would exit the market.
Or at least the effectively dude bug pulling back on.
On their grading rate have you seen anything like that this time around.
Good morning, Mark we've seen Warren and.
I can tell you the reason why but security benefit life has pulled out of the Guardian can guaranteed income business and.
So I think us in some of the other companies that are in that space It probably.
Captured some of that business.
Thank you.
And our next question comes from the line of Pablo seems all of JP Morgan.
[noise] does this one's for Ted Ted.
Can you speak to what happens with operating expenses this quarter I think.
They were higher or whether you look at it sequentially or year over year and I guess, how are you thinking about that number going forward [noise].
So sequentially we are up.
4.4 million approximately about 1.9 billion up that 4.4 million for.
One time expenses that won't be repeatable you know after that you know alpha which you should also looked at year increase and our risk charges that we pay Hanover bore the redundant reserve financing I think that was up a half a million dollars quarter last quarter over this quarter.
Okay [noise].
And then the second question I had was a for a year or maybe a non so.
Are you manage kovac from a tablet perspective, Oh, how are you thinking about having access to capital today versus maybe at some point into future I guess like it's having a the good pigeon facility something you're considering or would you be <unk> reinsurance or capital markets being open down the road you do need to.
That them in the future.
Do you want to comment on <unk> I didn't I used truck now that and we're just dealing with being in different geographies, everyone, though that looks like now that.
You know Pablo I think we're being proactive and looking at opportunities and we'll continue to do that both from a reinsurance on capital risk perspective, and looking at what opportunities are out there assessing and also looking at what avenues within going to the market. It needed was there and if there are reasons to.
Our opportune times too so we're not sitting back we are being proactive and thinking about that and we'll continue to look at that as conditions materialize. We go through the next several quarters.
[noise] and the only thing I would add is.
That as we it's not just reinsurance are accessing the market to raise the right capital Opportunistically also as we look at our asset liability management as a team they may be waste for to optimize capital charges on the investments I knew or areas that we're evaluating the point that I made about breaking stability you wouldn't be net new money is an important one.
Of the underlying portfolio. So I think that did an add on to what.
[noise], Okay. Thanks for your answers guys.
There are no further comment at this time.
Thank you for your interest in American equity and for participating in today's call should you have any follow up question. Please feel free to contact us.
[noise].
[noise].
Mm Hmm.
[music].
[music].