American Equity Investment Life Holding (AEL) Q1 2019 Earnings Call Transcript

American Equity Investment Life Holding (AEL)
Q1 2019 Earnings Call
May. 02, 2019, 9:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Welcome to the American Equity Investment Life Holding Company's first-quarter 2019 conference call. At this time, for opening remarks and introductions, I would like to turn the call over to Julie LaFollette, coordinator of investor relations.

Julie LaFollette -- Coordinator of Investor Relations

Good morning, and welcome to American Equity Investment Life Holding Company's conference call to discuss first-quarter 2019 earnings. Our earnings release and financial supplement can be found on our website at www.american-equity.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. Presenting on today's call are John Matovina, chief executive officer; Ted Johnson, chief financial officer; and Ron Grensteiner, president of American Equity Investment Life Insurance 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 those actual results to differ materially are discussed in detail in our most recent filings with the SEC. An audio replay will be made available on our website shortly after today's call.

It is now my pleasure to introduce John Matovina.

John Matovina -- Chief Executive Officer

Thank you, Julie. Good morning, everyone, and thank you for joining us this morning. Our first-quarter results were again solid, giving us a strong start to the year. Non-GAAP operating income for the quarter was $89 million, $0.97 a share.

That's almost flat with the fourth quarter of 2018 despite a decline in the benefit from the non-trendable investment spread items we had in the fourth quarter. So as a reminder, the three key metrics that drive our financial performance are growing our invested assets and policyholder funds under management, generating a high level of operating earnings and growing asset base through investment spread, and then minimizing impairment losses in our investment portfolio. So for each of those measures in the first quarter, policyholder funds under management, we delivered 1% sequential growth. In a trailing 12-months basis, it was 5%.

On a trailing 12-month basis, we generated about a 16% non-GAAP operating return on average equity. That excludes the impact of the actuarial assumption reviews that we had in the third quarter of last year. And in the first quarter, we do not have any investment impairment losses, but we did incur some modest capital losses on the sales of a few fixed maturity securities. The growth in policyholder funds under management for the quarter was driven by $1.2 billion of gross and net sales that reflects the new products that were introduced and crediting rate changes that we made in the fourth quarter of last year.

Sales have been on the upswing the last three quarters, and that momentum has carried over into the second quarter. You'll hear more about the sales environment and competition from Ron in a few minutes. We delivered a sequential increase in investment spread in the first quarter despite a lower benefit from the non-trendable spread items. The sequential decrease was largely due to a lower cost of money, which benefited from decreases in the cost of options purchased in the fourth quarter and early in the first quarter.

The cost of option purchases has risen since early January as volatility has declined, but the overall cost still remains below the weighted average cost that we had for 2018. Ted will have more details on investment spread in his remarks. So I'll be back at the end of the call for some closing remarks. Now I'd like to turn the call over to Ted for additional comments on first-quarter financial results.

Ted Johnson -- Chief Financial Officer

Thank you, John. As we reported yesterday afternoon, we have non-GAAP operating income of $89 million or $0.97 per share for the first quarter of 2019, compared to non-GAAP operating income of $77.7 million or $0.85 per share for the first quarter of 2018. The 2019 amounts are up 15% and 14%, respectively. Investment spread for the first quarter was 258 basis points, up 2 basis points from the fourth quarter as a result of a 5-basis-point decline in the cost of money, offset by a 3-basis-point decrease in the average yield on invested assets.

Trendable spread in the first quarter was 252 basis points, compared to 248 basis points in the fourth quarter of last year. Average yield on invested assets was 4.48% in the first quarter, compared to 4.51% in the fourth quarter of 2018. The decrease in the average yield in the quarter reflected a decline in the benefit from non-trendable investment income items, which were 7 basis points in the fourth quarter of 2018 and just 2 basis points in the first quarter of 2019. The decline from trendable investment income items was partially offset by a 2-basis-point increase in our average yield on invested assets from the $4.7 billion of floating rate instruments in our investment portfolio.

The average yield on fixed income securities purchased and commercial mortgage loans funded in the first quarter was 4.69%, compared to 5.02% in the fourth quarter of 2018. The lower yield for the first quarter reflects both the general decline in interest rates, as well as a higher allocation to purchases of corporate bonds than we expect for the full year as new issuance in the structured securities market was light in the first quarter. We did not undertake portfolio realignment trades in the quarter but continue to look for opportunities to enhance our investment returns without a material increase in credit risk. As we stated in the past, we do not believe that our recent emphasis on purchases of asset-backed securities such as collateralized loan obligations has led to any material increase in credit risk.

NAIC three investments were 2.7% of fixed maturities at March 31, compared to 2.5% at year-end 2017, prior to increasing our allocations to asset-backed securities. Further, we do not believe even in a stressed -- a severe stressed scenario, like the 2008 financial crisis, that our CLO or CMBS portfolios would suffer significant default losses. As we stated on our fourth-quarter 2018 earnings call, the subordination levels for CLOs required by the rating agencies at each ratings level are significantly higher than -- higher today than in 2007. Applying loss or ratings migration rates incurred during the 2008 financial crisis to today's market does not seem useful.

The aggregate cost of money for annuity liabilities was 190 basis points, down 5 basis points from the fourth quarter of 2018. The benefit of overhedging of index-linked interest obligations was 2 basis points in the first quarter, compared to 3 basis points in the fourth quarter of 2018. We estimate that trendable cost of money declined by 2 basis points in the first quarter primarily due to the sharp decline of option cost in December and continued low cost in the first quarter. As we have pointed out in the past, the cost of options for monthly point-to-point index strategies reacts inversely to volatility and the high percentage of policyholder funds, and monthly point-to-point strategies can translate into trends and option costs that are not intuitive relative to the direction of equity market volatility.

With the decline in equity market volatility since early January, we have experienced an increase in the cost of options purchased. However, the cost of options still remains below the weighted average for 2018. In part, we believe this is due to the reductions in fixed rates, caps and participation rates on annual point-to-point and monthly average strategies on $35 billion of policyholder funds under management we initiated in October. We expect this reduction to produce annual savings in the cost of money of nearly 7 basis points on the $35 billion and almost 5 basis points on our entire in-force once fully implemented over the next several quarters.

Continuing the trend of the last few quarters, the change in product mix away from bonus products to non-bonus products increased the cost of money by 1 basis point in the first quarter compared to the fourth quarter. non-bonus products, which include the American equity AssetShield and Choice and Eagle Select series, have a lower spread requirement compared to bonus products as a bonus needs to be recouped through a higher investment spread. We continue to have flexibility to reduce our crediting rates if necessary and could decrease our cost of money by roughly 61 basis points if we reduce current rates to guaranteed minimums. This is down from 63 basis points at year-end.

Operating expenses increased 16% sequentially in the quarter. The sequential increase in operating expenses reflected a $1.2 million increase in salary and benefits, resulting from the company's growth and timing the salary increases. $800,000 in additional risk charges for excess regulatory reserves ceded to an unaffiliated reinsurer as a result of an increase in the excess regulatory reserves ceded and a $2.4 million increase in miscellaneous items such as legal fees, consulting fees and nondeferrable policy acquisition expenses associated with marketing and cost of conferences. Our estimated risk-based capital ratio at March 31 is 352%, compared to 360% at December 31, 2018.

The decrease from year-end reflected an increase in required capital from growth in the balance sheet, combined with a decrease in total adjusted capital as a result of a statutory net loss for the quarter. The statutory net loss was attributable to lower option expiration proceeds and related index credits as a result of the weak equity market performance in the fourth quarter and its impact on policies with an anniversary in the first quarter. Net index credits were just 0.6% of account value in the first quarter, compared to 1.4% in the fourth quarter of last year and 3.6% to 5.4% in each of the first three quarters of 2018. Assuming current equity markets, we expect weak option expiration proceeds and index credits for each of the next two quarters, with the fourth quarter up appreciably from the current quarter.

Although low option expiration proceeds and related index credit can affect statutory capital and surplus and risk-based capital in the short run, over the long run, market movements tend to even out, and we expect the policies to perform in line with pricing expectations. Now I'll turn the call over to Ron to discuss sales, marketing and competition.

Ron Grensteiner -- President

Thank you, Ted. Good morning, everyone. As we reported yesterday, gross sales for the first quarter of 2019 were $1.2 billion, a 10% sequential increase compared to the fourth quarter of 2018 and a 20% increase from the first quarter of 2018. Net sales for the quarter increased 13% sequentially and 26% year over year, reflecting the increases in gross sales and the scheduled reduction and coinsurance ceded for Eagle Life's fixed index annuity sales from 15% to 20%.

In the independent agent channel, the sales environment in the quarter remained competitive but with competitors acting rationally. While we saw some credit rate increases in January, we saw a number of decreases in February, March and now into April, presumably reflecting the decline in interest rates. For example, a major competitor lowered participation rates on its best-selling hybrid index product on April 1, reversing the changes it made back in early October. We did see a major competitor lower guaranteed income in the quarter, but we saw two others raise income to very competitive levels.

Reflecting a decline in interest rates since year-end, we took our own action in mid-April and generally lowered participation rates on S&P 500 annual point-to-point strategies, where accumulation products by about 4 percentage points. For example, the participation rate on AssetShield 10 or Choice 10 with the MVA is now 50%, down from 54% previously. However, a 50% participation rate on the S&P 500 is still attractive, and our participation rates on the volatility-controlled Dividend Aristocrats excess return index have not changed. Returns on the Dividend Aristocrats excess return strategies illustrate very well, competing against accumulation products featuring hybrid indices.

In the first quarter, combined sales for AssetShield and the Choice series, our primary accumulation products for independent agents, were 41% of American Equity Life's fixed index annuity sales. Guaranteed lifetime income remains a significant focus for us. IncomeShield accounted for 39% of sales in the first quarter, compared to 33% of sales in the fourth quarter of last year and was our second best -- was the second best-selling guaranteed lifetime income product in the independent agent channel in the fourth quarter. While we typically don't talk about new selling relationships at American Equity Life, you may have seen from the press that we were selected by Kindur to be the digital platform's guaranteed lifetime income provider.

Kindur is one of the few financial digital advice in investment management firms, focused on decumulation. We are thrilled to be its exclusive provider of a no-commission fixed-rate annuity with a lifetime income benefit provider. Turning to pending. Pending business at American Equity Life averaged 3,063 applications during the first quarter and was 3,275 at the end of March, compared to 2,793 applications when we reported fourth quarter earnings.

Pending applications peaked at 3,610 in mid-April in conjunction with our new money rate reductions. Pending this morning stands at 3,146, compared to 2,580 one year ago. The increase in Eagle Life sales reflects the addition of one of the country's 15 largest banks based on assets as a distributor, which we mentioned this on the fourth-quarter call. We are seeing meaningful sales from this relationship.

It was our third largest sales relationship in the first quarter. At current run rates, there is a possibility of seven accounts producing sales of $50 million or higher in 2019 compared to four such accounts in 2018. Year-to-date, sales at these four accounts are up 15%. Eagle Life sales are also benefiting from the expansion of our employee wholesalers.

We now have 10 employee wholesalers, up from four at the beginning of the year, who will work with those accounts not willing to work with third-party wholesalers and could also assist our third-party wholesalers. Our employee wholesalers are now working with five meaningful accounts. The broker-dealer channel remains intensely competitive, although we lowered participation rates in mid-April, similar to the changes at American Equity Life, others did as well. We are still generally ranks No.

1 or two in terms of S&P 500 annual point-to-point participation rates not supported by a spread. However, a number of competitors still have S&P annual point-to-point caps at 6%, which we just can't match while maintaining target spreads. Pending applications today at Eagle life stand at 380, up from 239 a year ago and 224 when we reported first-quarter earnings. Pending applications peaked at 479 in mid-April in conjunction with our new money reductions.

And with that, I'll turn the call back to John for closing remarks.

John Matovina -- Chief Executive Officer

Thank you, Ted and Ron. We're pleased with our first-quarter operating income and the growth in sales. Our current product offerings are competitive even after our crediting rate changes. And as said earlier, our sales momentum has carried over to the second quarter.

And we're particularly pleased with our selection by Kindur to partner with us. We believe Kindur's choice reflects American Equity's commitment to service, transparency and renewal crediting rate integrity. As we've said in the past, our long-term outlook remains quite favorable due to the growing number of Americans who need attractive fixed index annuity products that offer principal protection with guaranteed lifetime income. Key initiatives for the remainder of 2018 will be to continue to increase our footprint in the bank and broker-dealer distribution channels and to continue to focus on widening our investment spread without taking undue credit risk.

So on behalf of the entire American Equity team, thank you for your time and attention this morning. We'll now turn the call back to the operator for questions.

Questions & Answers:

Operator

[Operator instructions] Our first question comes from Pablo Singzon of J.P. Morgan.

Pablo Singzon -- J.P. Morgan -- Analyst

John, I wanted to get your thoughts on the implication of retirement reform being discussed in Congress right now. So in particular, if annuities can be more easily sold inside the retirement plan, do you see it as a threat or opportunity for AEL? And maybe you can help contextualize that by mentioning how much of your business is from IRA rollovers.

John Matovina -- Chief Executive Officer

I don't know -- I don't know how much of our business is from IRA rollovers. It's been a while since we focused in on what was the breakdown of qualified and nonqualified. I'm looking at Ron and he's --

Ron Grensteiner -- President

Well, 60% to 70%, I think, is qualified.

John Matovina -- Chief Executive Officer

Is still qualified? OK. And that's going to be majority rollover IRA-type business. So that percentage is quite similar to where it was back when the DOL fiduciary rule is high in everybody's minds.In terms of the proposals, I haven't read or looked at those specific. One view I've typically had though about annuities and plans is that retirement plans have a focus on liquidity.

And one of the key elements of an accumulation annuity is the surrender charge period, which facilitates our investment horizon. And if they're going to allow that type of approach in those plans, it will -- there's perhaps an opportunity there. But if they're going to look for product -- annuity products and annuities that have a similar-type liquidity features as do the securities and mutual funds that are already in retirement plans, I just don't view that as much of an opportunity.

Pablo Singzon -- J.P. Morgan -- Analyst

OK. And then my second question was about the fiduciary, who hasn't been in the forefront for a while, but I wanted to get your expectations for the standards from the SEC and DOL standards. They seem to be slated for release in September of this year. Do you expect any significant changes in your current sales practices? And the same question for sales practices of the broader industry or maybe your immediate competitors.

John Matovina -- Chief Executive Officer

Well, I think those things are focusing on the securities business. And I think our statement's been in the past that, obviously, we're monitoring those to see how they might influence insurance suitability standards. And I think our insurance regulators are kind of in that position as well. They're holding off on finalizing any changes that they might make suitability until they get a clear view of what's going to happen in the securities world.

Operator

Our next question comes from John Nadel of UBS.

John Nadel -- UBS -- Analyst

Two questions. The first on expenses. I know we talked about this a little bit last night, but expenses have been running sort of low-30s million dollars quarterly. This quarter, obviously, significantly above that level, at least on a percentage basis.

Just wondering if you can give us any help in understanding -- I know there's moving parts from time to time, but any help in understanding on a sustainable basis what you think a reasonable baseline is for the expense rate -- expense level.

Ted Johnson -- Chief Financial Officer

Well, going back to the expense increases that I detailed earlier in my prepared remarks, when we look at the salary and benefits increase, so the $1.2 million, we have changed here at the company that we're doing our annual increase in salaries for all employees effective January 1 versus on that each individual employee's anniversary date. So that $1.2 million is all -- is going to be predominantly a recurring expense going forward, along with the additional risk charges that I quoted in regards to the reinsurance agreement. Now with the $2.4 million of other miscellaneous items, the variety of that can ebb and flow, depending on activity here at the company. And so that's really -- but there isn't any one specific project or some kind of other expense item in that $2.4 million that is specifically a recurring expense that will happen throughout the year.

It depends on variety of activity here at the company.

John Nadel -- UBS -- Analyst

OK. Got you. That's helpful. So it sounds like -- and you don't necessarily need to opine on this, but it sounds like something in the mid-30s range is sort of a reasonable way to think about a baseline.

Second question is unrelated, and it's for you, John. It's been nearly a year since the company formally indicated it was evaluating a potential transaction. I was just wondering, given how long it's been, are you willing yet to provide the market a formal update as to whether that potential transaction is still actually available to you? If the potential buyer has walked away or has otherwise maybe been prevented from acquiring you, isn't that a material development that your shareholders should know about?

John Matovina -- Chief Executive Officer

John, we have no comments to make at this time to supplement what was said last May.

Operator

Our next question comes from John Barnidge of Sandler O'Neill.

John Barnidge -- Sandler O'Neill -- Analyst

Not to necessarily beat a dead horse, but maybe asking John's question differently. If the sales process is done, would you announce that the sales process is done?

John Matovina -- Chief Executive Officer

John, we have no -- the answer is the same. No comments to make.

John Barnidge -- Sandler O'Neill -- Analyst

OK. My follow-up question. The wholesalers hired during the quarter, can you talk about expected ramp-up time and maybe what you think they can produce in a year or 2's time?

Ron Grensteiner -- President

Well, we're strategically hiring those wholesalers in different parts of the country where they can make a difference. At this point, we just have three accounts where we have meaningful opportunities for those wholesalers to work. And then they are also working with a couple of accounts where we're co-wholesaling, where there's already a third-party wholesaler, and we're just assisting in helping in those situations. So in one example, where our first account that we started wholesaling in, they made a tremendous difference.

It was -- in this particular account, they had $10 million in sales in 2017. They increased it to $30 million in 2018. And we expect that one account to be a $50 million account this year. So they're having a meaningful impact.

In one of the accounts where they're co-wholesaling, they're also having a significant impact in that the states where we had those wholesalers, that account increased sales 147% in 2018 over 2017. And where we didn't have wholesalers -- our employee wholesalers, that same account without us increased sales 44%. So they're having an impact. Yes, there is a ramp-up time.

The other key to it is we got to have our acquisition manager get more accounts for us, which I'm not very patient, but I'm finding you have to be more patient in the broker, dealer and bank channel than the independent channel, which just takes time to get more on the platform.

John Barnidge -- Sandler O'Neill -- Analyst

Great. And if I could ask another question. New money yields ticked down. It makes sense given where yields were.

But can you talk about kind of where -- what you've been seeing on a new money front in 2Q to date?

Ted Johnson -- Chief Financial Officer

Yields have maintained for us, and most of it comes from the timing of when we purchase certain securities. For the month of April, we were north of 5% in our yield, but I don't think that's sustainable going forward. It was on lower volume, and we had a number of securities that just happened to price and settle in the month of April. I will use -- in terms of forecast, I will use a similar spread of what we had between 150 and 200 off the 10-year as typical where we've been purchasing over the last four to six quarters and as typical by what we would see going forward.

And it really depends on the timing of certain asset classes. We've added some new asset classes to the portfolio and getting those ramped up. Those should help support some higher yields, but it does take a little bit of time to get that flow moving in, especially on some of the asset classes that we're in.

Operator

Our next question comes from Randy Binner of B. Riley FBR.

Randy Binner -- B. Riley FBR, Inc. -- Analyst

So when we could just do a little review of pending accounts. Ron, did you -- I think you said about 3,500 was the current level. Can you just remind us of -- can you confirm if I heard that correctly as the current? And then just kind of a reminder of where -- this is for American Equity, where they were trending also in the kind of month by month in the first part of the year?

Ron Grensteiner -- President

Well, pending this morning at American Equity Life was 3,146. During the quarter, we averaged a little over 3,000, 3,063, and it kind of ramped up during the quarter and peaked out in mid-April in kind of -- in conjunction with our rate change. And it peeked out at 3,610. A year ago today, it was 2,580.

Randy Binner -- B. Riley FBR, Inc. -- Analyst

OK. So 3,000 has kind of been the baseline. And then somewhat production-related is the use of this coinsurance has gone down, so there's not as much business being ceded. So would that potentially cause you -- I mean sales are -- they're good, for sure, in a competitive environment.

They're not so high. I would think you would need reinsurance for capital, but I know it's available, and there's a little bit of a change there. So can you update us on how you might think about using reinsurance?

John Matovina -- Chief Executive Officer

This is John, Randy. Yes. Certainly, reinsurance remains a very viable option if needed to, in effect, manage capital or RBC, and that the decrease in the coinsurance percentage was a scheduled decrease on the Eagle book -- or the Eagle FIA book. So there's currently no coinsurance of any American Equity FIA business.

And as you commented and as we are aware, there are parties out there that are certainly interested in coinsuring business for companies that -- for whatever purpose, the company might have, be it capital management or promoting sales.

Randy Binner -- B. Riley FBR, Inc. -- Analyst

Right. But, I mean, at this point, is it -- am I correct in thinking that this kind of level of sales, you're not adding a lot of RBC need -- RBC ratio need? So is that the right way of thinking of it? Or would that extra capital support be necessary given kind of this baseline of sales?

John Matovina -- Chief Executive Officer

I'd say we're not feeling any pressure at the moment. Run off and do a coinsurance deal as the year progresses and we see how things develop. If the indications are that some level of capital support is needed, reinsurance would be an option to be considered. The other option is, obviously, we have a little bit of liquidity at the holding company at the moment that's accumulated, and we have the $150 million bank revolving facility that could be used as -- that's not permanent financing, but that could be short term, a year or two, until we would settle on what a more permanent outcome might be.

And those answers aren't any different than the things we were saying two or three years ago when sales were at a $7 billion annual pace back then.

Operator

Our next question comes from Alex Scott of Goldman Sachs.

Andrew Stein -- Goldman Sachs -- Analyst

This is Andrew Stein asking on behalf of Alex. My first question is on the higher operating expenses. Are any of those related to implementing new FASB accounting standards? And as you prepare for the standards, I was wondering if you could provide an update on what you're seeing as you got through the work?

Ted Johnson -- Chief Financial Officer

No. Those expenses are not related to the new accounting standard. And in regards to the new long-duration contract standard, we're continuing to assess that, but we really don't have any update on this time. I think us, along with the rest of the FIA industry, are continuing to look at that and work with our advisors and work with each other to determine what the right approach is going to be.

Andrew Stein -- Goldman Sachs -- Analyst

OK. And then my follow-up, saw that the MYGA sales were up again this quarter after falling off a little bit last quarter. Could you discuss the competitive environment there in the sales outlook?

Ted Johnson -- Chief Financial Officer

For MYGA sales?

Andrew Stein -- Goldman Sachs -- Analyst

Yes.

Ted Johnson -- Chief Financial Officer

Well, we're certainly not at the top of heap of MYGA sales. We're probably 15 to 25 basis points below the top MYGA rate. It's not our desire to have the highest rate, but we want to be competitive because it's a door opener for our wholesalers and for our third-party marketers to talk to reps and hopefully have them get a piece of business for the company. And then when they have a chance to sample our service and our speed of issue, that the next conversations can be around an FIA.

So we use the MYGA products to be competitive and strategically.

John Matovina -- Chief Executive Officer

But in some of the direct though for Q1, the new bank relationship at Eagle Life, the early emphasis of product in that bank has been on MYGA.

Andrew Stein -- Goldman Sachs -- Analyst

Got it. And then if I could sneak one more in. On the investment portfolio, there's been some de-risking across the industry this quarter, and I was just wondering if you can provide your updated thoughts on the portfolio allocation and any potential de-risking.

Ted Johnson -- Chief Financial Officer

Well, overall, we have kind of a long-term strategy, and we're marching toward that. I don't know that we've ever had excess risk that we really need to go in and de-risk. The first quarter, a lot of what we purchased were straight public corporates and well-structured private placement that was a preponderance of the investments. We had a few allocations to structured assets and then commercial mortgage loans, which typically for us are highly conservative.

And so from that standpoint, there wasn't a real sense of de-risking. Our allocation has been to the more blocking and tackling of our core premise around our investments, which is high-quality assets that provide good liquidity.

Operator

Our next question comes from Dan Bergman of Citi.

Dan Bergman -- Citi -- Analyst

First, I wanted to see if there's any more color or quantification you can provide around what current option costs are and how that compares to the recent weighted average levels. And just any sense you can give around how much potential upside to the cost of money from this that could be at the current level of option costs versus going forward?

Ted Johnson -- Chief Financial Officer

Sure. So on cost of options at American Equity during the first quarter averaged about 175 basis points, and that's compared to 183 basis points in the fourth quarter or 191 basis points for all of 2018. So what we're seeing -- obviously, what we saw in the first quarter is putting on options at a lower cost, albeit option costs are up a little bit from where they were, but we're still putting them on at a lower level than what the average was for 2018. So, for instance, last week, the cost of options at American Equity Life was approximately 180 basis points.

Dan Bergman -- Citi -- Analyst

Got it. And then just shifting to the RBC ratio. It sounded like a main driver of the decline in the quarter was the lower index credit impacting stat earnings, which could persist for a couple of more quarters. I just wanted to see if it's possible to quantify -- or get some color on how much pressure on the RBC ratio from that factor we should expect over this period at current market conditions.

The 8-point decline this quarter, a reasonable expectation. And just related to that also, I know things have changed since the tax reform impact. I just wanted to see if there's any updated sense you can give on what RBC level you're comfortable over target running that going forward.

Ted Johnson -- Chief Financial Officer

Well, you are correct. We would expect low index credits over the next couple of quarters and then see them rebound in the fourth quarter. Overall, in capital, we would like to manage closer around to a 360. At points in time, we could see our capital go below that ratio just because of this instance with low index credit, but we would expect it to rebound over time.

It's a short-term phenomenon. And as John said, if we deem that we need to manage capital, as we always have in the past, the options for us are reinsurance, which are there's quite a number of people out there that would like reinsurance with us. We have debt capacity and then liquidity at the holding company to manage that ratio if it needs to be managed.

Operator

[Operator instructions] Our next question comes from Tom Gallagher of Evercore.

Andy Lee -- Evercore ISI -- Analyst

This is Andy Lee on for Tom. Just hoping to ask more about the competitive environment. You said there are some products where you just can't match the benefits that some of your competitors are offering. Just hoping you can discuss who these players are.

Are they the traditional insurance companies out there? Or is it mainly coming from some of the newer private equity-backed insurance companies?

Ron Grensteiner -- President

This is Ron. We're pretty competitive at American Equity, both in rates and income. The disparity is more apparent at Eagle Life in the bank channel. Our cap rate on our most popular product in the bank channel is 5.25%, and that's on an eight-year product.

We see one company is at 6.35%. Global Atlantic is the company, and it's a five-year product. And they also have another cap at 6.25% on a seven-year product. Great American, which is typically the leader in the bank channel, has dropped below 6%, but they're still at 5.85% on their best-selling product.

AIG is also -- is competitive with a 6.2% cap on one of their products on a five-year product.

Andy Lee -- Evercore ISI -- Analyst

Got it. That's helpful. And just shifting to the investment portfolio. Hoping to ask a question on CLOs.

I see that's about doubled in size over the past year, and it sounds like you want to continue adding more to that asset class. I'm just wondering, as you think about your go-forward investment strategy, how you see this allocation as a percentage of your portfolio going forward. I see it's about 10% of your fixed maturities right now. Is there a maximum allocation that you would be willing to take on just given the risks associated with that class versus traditional corporates?

Ted Johnson -- Chief Financial Officer

Yes. Our CLO portfolio did grow last year. It was an area of opportunity that we saw, long term, 10% is on the higher range. I'm not sure where the interpretation that we were going to add to that asset class are.

Our long-term strategic is 7% lower than where it is today, and some of these newer asset classes that we're diversifying into to get broader risk diversification in the portfolio will help align that. But it's -- there's a process here where we had -- we're ramping up as we bring some other asset classes in play, and our longer-term allocation is smaller to that asset class.

Operator

We now have a follow-up question from Pablo Singzon of J.P. Morgan.

Pablo Singzon -- J.P. Morgan -- Analyst

So first one is -- so clearly, rates have pulled back, but your new money yield is still above the portfolio yield. So the question is do you expect the portfolio yield to be able to spread the same way that the cost of money is helping spread margins right now?

Ted Johnson -- Chief Financial Officer

Pablo, can you restate that, please?

Pablo Singzon -- J.P. Morgan -- Analyst

Yes. So interest rates pulled back beginning of the year, but -- and your new money yield went down as a result. But that's still above the portfolio yield. Now I realized the right comparison is new money yield versus what's rolling off [Sp] the portfolio, but I just wanted to get a sense from you if you think interest rates, as they are right now, are a tailwind for spread margins in the same way that the cost of money is helping spread margins right now.

Ted Johnson -- Chief Financial Officer

I would say no, not from the yield side. I'd say more positive from spread is going to be through the cost of money based upon where current yields are at that are available to us and what we're investing in.

Pablo Singzon -- J.P. Morgan -- Analyst

Got it. OK. And then second question, switching to sales and marketing, so this is for Ron. So from your comment, it seems like some sales were pulled forward ahead of the product benefit reductions in April.

So do you think [Inaudible] sales in the third quarter or maybe even the fourth quarter? And maybe you can sort of frame that by talking about your -- all the historical experience and past reductions and contextualizing what you're doing now with what your competitors are doing.

Ron Grensteiner -- President

Well, Pablo, you're right. When you have a rate reduction, usually, it pulls some sales forward. It's kind of an indication why we had to [Inaudible], and it's dropped back somewhat since. But as I look at the competitiveness of our products, I think we have -- we're poised for a strong year at both companies.

I guess the rates are competitive in both companies with a 50% participation rate at American Equity. And our part rate strategy is resonating well at Eagle Life. And then you have the addition of the employee wholesalers are also having an impact there. So going forward, I can't predict how we're going to do, but I think we're in a strong position compared to our competitors for a strong year of sales.

Pablo Singzon -- J.P. Morgan -- Analyst

All right. And last one, also for Ron. I know I always ask you some version of this question, but I just want to ask again if you could provide more background or context of your strategy for growing [Inaudible] brokers. Are you casting a wider net as possible? Are you focused on the [Inaudible] or looking in certain geographies.

Just I wanted a better sense of what you're trying to do in that channel.

Ron Grensteiner -- President

You bet, Pablo. Well, We're operating at a little bit of a disadvantage in that a lot of our competitors are already on the platforms that they previously sold variable annuities. So our challenge is we have to make a good case and to get on those platforms. What is our value proposition that will help us to do that? And to this point, our value proposition has been, while we're not alone, having a participation rate strategy.

We are one of the few companies that has one. And we can demonstrate over historical -- with historical evidence that our participation strategy performed better than a cap rate strategy does. And if we can continue to get that message out there that we have a very good strategy, along with Eagle Life as the fresh new brand that a lot of institutions seem to like, and then add that value proposition of excellent customer service and relationship building, we think it's going to win the day, but unfortunately, it just takes time to get the -- get on the platform and then get your products approved in the platform. I think we have great opportunity at Eagle Life going forward with -- as we expand out our employee wholesalers and our acquisition manager.

We hope to add some decent accounts here in 2019. That could move the needle for us. And from there, we'll just keep after it and more boots on the ground.

Operator

Thank you. I would now like to turn the call back to Julie LaFollette for final remarks.

Julie LaFollette -- Coordinator of Investor Relations

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

[Operator signoff]

Duration: 48 minutes

Call participants:

Julie LaFollette -- Coordinator of Investor Relations

John Matovina -- Chief Executive Officer

Ted Johnson -- Chief Financial Officer

Ron Grensteiner -- President

Pablo Singzon -- J.P. Morgan -- Analyst

John Nadel -- UBS -- Analyst

John Barnidge -- Sandler O'Neill -- Analyst

Randy Binner -- B. Riley FBR, Inc. -- Analyst

Andrew Stein -- Goldman Sachs -- Analyst

Dan Bergman -- Citi -- Analyst

Andy Lee -- Evercore ISI -- Analyst

More AEL analysis

All earnings call transcripts