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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Hello, and welcome to the American Equity Investment Life Holding Company First Quarter 2020 Conference Call. At this time, for opening remarks and introductions, I would now like to turn the call over to Julie LaFollette, Coordinator of Investor Relations.
Good morning, and welcome to American Equity Investment Life Holding Company's conference call to discuss first quarter 2020 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 Anant Bhalla, Chief Executive Officer; Ted Johnson, Chief Financial Officer; and Jeff Lorenzen, Chief Investment Officer.
During his portion of the call, Jeff Lorenzen will be referring to the investments and capital update slide deck available on our Investor Relations website at www.american-equity.com. 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. 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 made available on our website shortly after today's call.
It is now my pleasure to introduce Anant Bhalla.
Thank you, Julie. Good morning, everyone, and thank you for joining us this morning. This is my first call as Chief Executive Officer of American Equity. While any new leader of an organization would prefer to start without the dark clouds of a global pandemic and its resulting economic recession, these uncertain times also allow us to reassess our capabilities and to explore new, unique opportunities to further differentiate ourselves to play offense in the marketplace.
In March, we moved decisively to first protect our employees and business partners and to pivot our operating platform to continue to provide FIA industry-leading levels of service to clients and producers in a prolonged work-from-home environment. In parallel, we fortressed the life insurance company balance sheet with $1.3 billion of liquidity as of March 31 and a pro forma 396% RBC ratio after reflecting a $200 million capital contribution from the holding company earlier this month.
With approximately 95% of the company's 630 associates fully functional, productively working from home since mid-March and a refreshed visibility into the resilience of our $52 billion of invested assets, we are now actively starting to find pockets to play offense in the marketplace. Allow me to elaborate.
In early April, American Equity announced prepayment of past deferred commissions under our stretch commissions program for over 2,700 producers to help our partners manage their own small business costs who, like other small businesses in America, have staff costs, bills to pay and don't know when they can return to business as usual. This amounts to American Equity paying $30 million of commissions earlier than when they came due -- when they would come due in 2020, half in April and half in July. It is acts like this during such moments of truth that further deepen our relationship with producers in the independent agent channel. This is one of many examples over the years of how American Equity has built and continues to maintain a fierce loyalty with long-established producers, especially with million-dollar-plus producers who numbered 974 last year. In the first quarter, 75% of American Equity Life sales came from these loyal producers.
At American Equity Life, the IncomeShield and AssetShield series of products accounted for 42% and 35% of gross sales, respectively, during the quarter. While these 2 products have been the drivers of sales growth since their launch in 2018, we are ready for a product refresh. Additionally, going forward, we will look to do more frequent product refreshers, starting with our accumulation product portfolio. The first such refresh will be the introduction of our first multi-asset index strategy in June. This adds to our distribution partners' tool kit of client solutions while reducing the vulnerability of cost of money to changes in implied volatility in the marketplace, as is the case for some popular new product strategies, like plain vanilla S&P 500 annual point-to-point participation rates.
Liability-driven investing is key to success in this business. I'm at day 68 as CEO, and I can already share 2 key areas of focus on this theme. First, we will continue to expand our asset classes, either internally or with multiple best-of-class nonaffiliated investment managers. The current market and economic conditions provide compelling opportunities for this. Second, on a go-forward basis, we will look to manage investments with a lens of both potential ultimate credit losses over the cycle and factoring the cost of incremental required risk capital in the event of ratings downgrades, even if the asset has remote ultimate loss realization risk. This approach, for example, would likely have us deprioritize adding lower-rated investment-grade tranches of structured securities in favor of higher-rated investment-grade tranches with more rating stability or other asset sectors with greater risk-adjusted spread opportunity.
As we manage through a prolonged economic recession, we will operate with a fortress balance sheet. Our strategic focus will be on retooling our capabilities for excellence in the areas of distribution, product manufacturing, investment management and capital optimization. This is intended to drive incremental growth of valuable revenue by having a sustainable, dominant position in the independent agent channel. Over the next 12 to 18 months, the existing core business is our primary focus. Refresh capabilities in each of the 4 mentioned areas will be the basis to drive additional growth in Eagle Life or other near adjacencies in 2021 or later.
Moving on to results for the quarter. Let me start with sales, and then we'll get to the financials. Gross sales of $705 million fell 23% compared to the fourth quarter of 2019 driven by declines in sales at American Equity Life and Eagle Life of 23% and 26%, respectively. While entering the quarter, we were not in the top tier of competitiveness in either the accumulation or income markets in the independent agent channel, participation rate changes made by competitors during the quarter had bridged that gap in our favor, and our Dividend Aristocrats Excess Return strategy now illustrates particularly well. As expected, competitors brought down guaranteed income to levels much closer to our own as well during the quarter.
In the first quarter, pending averaged 1,552 apps at American Equity Life and currently stands at 1,113; pending at Eagle Life averaged 132 and currently stands at 81. Given the current COVID-19 situation, the much-needed limitations on face-to-face meetings and increased social distancing requirements, sales pipelines for us and others in the industry will slow down. Given the fact that we are a scale player with already $53 billion of policyholder funds under management, this will be less of an impact on us than for either new entrants or for those that are less cost efficient.
For the first quarter of 2020, we reported non-GAAP operating earnings of $154 million or $1.67 per share compared to $89.4 million or $0.97 per share for the first quarter of 2019. Even excluding the $31 million or $0.33 per share onetime tax benefit from the enactment of the CARES Act, this was a record first quarter for the company, driven primarily by investment spread and a decline in the amortization of deferred acquisition and sales inducement costs.
Now I would like to turn the call over to Ted for additional comments on first quarter financial results.
Thank you, Anant.
We had 2 discrete items this quarter. First, as Anant discussed, we recognized a $31 million or $0.33 per share onetime tax benefit from the enactment of the CARES Act, which allows net operating losses created in 2018 through 2020 to be carried back 5 years for tax purposes, which includes years in which the tax rate was 35%. Second, we recorded a $2 million pretax or $0.02 per share loss from the write-off of unamortized debt issue costs for the subordinated debentures that were redeemed with a portion of the proceeds from our perpetual preferred stock issuance last November.
Average yield on invested assets was 4.36% in the first quarter of 2020 compared to 4.52% in the fourth quarter of 2019. The decrease was primarily attributable to a 6 basis point reduction in the benefit from nontrendable investment income items and 2 basis point reductions each from the decline in yields on floating rate investments, yields on new money investments and interest foregone due to the buildup of cash. The aggregate cost of money for annuity liabilities was 172 basis points, down 3 basis points from the fourth quarter of 2019. The benefit from overhedging index-linked interest obligations was 5 basis points, unchanged from the fourth quarter. Excluding the benefits from overhedging, the decline in the adjusted cost of money reflects a year-over-year decrease in 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 effect of overhedging and other nontrendable investment income items, was 253 basis points in the first quarter compared to 259 basis points in the fourth quarter of 2019. In our analysis of trendable spread this quarter, we identified 4 basis points of yield that should have been classified as additional prepayment income for the fourth quarter of 2019, which has been reclassified in our financial supplement. The average yield on investments acquired in the quarter was 3.49% compared to 3.74% in the fourth quarter of last year. We purchased $907 million of fixed income securities at a rate of 3.32% and originated $299 million of commercial mortgage loans at a rate of 4.02% 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 cost of certain options in March as volatility surged. From a low of 148 basis points for the hedge week ended February 25, option costs at American Equity Life rose to 173 basis points 1 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 costs of the cliquet options we purchased to hedge our monthly point-to-point strategies. Although the cost of options has fallen a bit as the equity markets have settled down, the cost of options backing our S&P 500 annual point-to-point participation rate and monthly average strategies remains high.
Beginning June 1, we will be reducing renewal participation rate on $4.3 billion of policyholder funds. When volatility falls back to February levels, we could begin to unwind these changes. Should the yields available to us decrease or the cost of money rise, 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 59 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 in the expected present value of future gross profits 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 500 were to remain at current levels, we would expect reserve accretion to be $15 million 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 in account values as a result of low index credit. The estimated risk-based capital ratio at American Equity Life as of March 31 rose 5 points from year-end to 377%, driven by an increase in surplus and a decrease in production on a trailing 12-month basis, partially offset by growth in the balance sheet.
On May 4, we made a $200 million capital contribution to American Equity Life, bringing the RBC ratio to 396% on a pro forma basis.
Now I'll turn the call over to Jeff to discuss our investment portfolio.
Thank you, Ted.
Before deep diving into the investment portfolio, I'll comment on the $31 million of 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 remaining time to touch on the investment capital update at www.american-equity.com. I'd like to start by stating that we have a very high-quality investment portfolio. As of March 31, fixed maturity securities were 98% investment-grade according to the NAIC, and we had over $2 billion of net unrealized gains as of April 30.
On Pages 4 through 7 of the investment and capital update, we highlight our corporate bond portfolio, is of exceptional credit quality with 98% rated investment-grade and is broadly diversified across credit sectors. Holdings in what we have identified specifically as COVID-19-exposed are quite manageable. Subsectors we focus on are energy, airlines and commercial aerospace, retail and lodging.
In the energy sector, we have $2.5 billion of holdings. The key takeaways here is that we believe 69% of our holdings, midstream, integrated and refining, are not at significant risk. Upstream segments account for 31% of our exposure. But even here, we have to differentiate. The subsector most vulnerable to low oil prices is 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 in holdings with an average cost basis of $0.45 on the dollar par. The other $328 million of book value in oilfield services consist of high-quality global names such as Baker Hughes, Halliburton and National Oilwell Varco.
Our retail exposure consists primarily of strong brands and e-commerce enabled credits. We tier these in 3 broad categories. Tier 1 is brand and 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, have remained operational. Tier 2 is consumer discretionary, include names such as Dollar General, Walgreens and Advance Auto. These will see more impact but also remain operational and open for business. Tier 3 is department stores and retailers. These are more at risk as most have closed storefronts during this period. However, they have maintained an e-commerce link to consumers that keeps cash flows active.
Our lodging and leisure exposures are minimal at just $144 million. Two credits we own are major lodging brands that have strong name recognition and loyalty, while the remaining holdings are private placements secured by key leisure assets. In aircraft, lessor and commercial aerospace, we have $574 million of exposure. Over 1/2 of our holdings are in enhanced equipment trust certificates or EETCs collateralized by young aircraft, which we have recourse to if the lessee is unable to make its payments. We have no direct exposure to the major airlines. Our commercial aerospace exposure is in critical aircraft and engine manufacturers like Boeing and Rolls-Royce.
Our CLO exposure is broken down on Pages 8 through 12. Our CLO underwriting process is anchored by 3 key elements: strong structural support, attractive underlying collateral characteristics and strong manager selection. Key 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 charts show, we have strong collateral characteristics, both in terms of below-average exposure to COVID-19-exposed sectors and higher-than-market credit ratings of underlying collateral. In addition, our CLO managers have historically outperformed the industry by a considerable amount, especially in challenging credit markets.
The point I'm trying to make here is 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 CLO portfolio was quite strong. As shown on Page 12, we would not expect any losses on our CLO portfolio even if each annual default rate experienced during the great financial crisis were 25% higher than realized then. It would take a market default rate of 175% of the great financial crisis levels to begin to cause losses in the BBB-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. I want to point out that we significantly curtailed new purchases since 2016. As we look through our structures, roughly 35% or $1.7 billion is retail-oriented properties. Our retail mall exposure is $741 million or approximately 43% of that retail exposure. Retail mall exposure is defined as large box anchor and small in line stores. Other forms of retail exposure include community shopping centers, lifestyle centers, neighborhood centers, power centers, single-tenant REIT and specialty retail. Of our mall exposure, nearly 60% is within single asset, single borrower or SASB transactions of high-quality top-tier malls with strong demographics and attractive valuation metrics. Mall of America would 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 our CMBS holdings. LTVs are relatively low, while the average debt service coverage ratio on the portfolio was over 2x. We expect to see pressure on net operating incomes for this sector for the next several months. Similar to our underwriting philosophy with CLOs, the CMBS portfolio has better credit enhancement than the market, and our collateral performance has been strong.
Finally, we have less than $200 million in paydowns before 2022, mitigating refinancing risk during a difficult commercial mortgage loan market.
If we look at Page 18, we present 2 resiliency analyses: a scenario based on the great financial crisis with 50% loss severity and an additional scenario with added stress on the lodging and retail sector. Our impairment estimates under these scenarios would be $46 million and $60 million, respectively. We have a very long and successful presence in the commercial mortgage loan market. We have $3.6 billion or 6.9% of invested assets in high-quality, well-underwritten commercial mortgage loans. All loans are first mortgage with 81% of our portfolio rated CM1 and 19% rated CM2.
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 and grocery anchored. Many of these still have active tenants such as tax preparers, insurance agents and carryout food providers. In addition, our underwriting focus tends to be in tertiary markets rather than large MSAs with high urban densities. As urban density has been a big driver of the spread of infection, tertiary markets are more likely to return to business sooner, an important factor for consideration.
On Page 21, we show a resiliency analysis in which we decreased strip retail property net operating income by 30%. Of our total retail portfolio of 270 loans, only 58 loans with an aggregate balance of $238 million would have a debt service coverage ratio of less than 1x. If we revalue the collateral using a 7% cap rate on the stressed net operating income, we estimate that only 15 loans totaling $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, working with stressed borrowers to provide temporary relief as we help them navigate the impacts of COVID-19. While this is a different set of circumstances, following the great financial crisis, our worst loss year in commercial mortgage loans was just $15 million in 2012 on a portfolio not 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 Reserve's CCAR stress test. This scenario is very much in line and may be even a little worse than actual experience during the great financial crisis. Loss modeling was performed by leading third-party investment systems for corporate credit, CMBS, CLO, ABS and other portfolios. Loss modeling on the commercial mortgage loan portfolio was based on historical company loss rates. The effect of ratings migration is based on internal company estimates and reflects the full amount of migrations, 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 Anant.
Thank you, Jeff.
Before turning the call over to the operator for Q&A, I want to take a few moments to talk about capital. As you can see from the scenarios presented by Jeff, we have more-than-enough capital to execute our business strategy through the current economic storm. Ratings downgrades and some realized credit losses are inevitable with a $52 billion portfolio geared towards generating investment income. However, I would reiterate Jeff's comments that our BBB corporate portfolio skews towards higher quality, as you saw from the individual names that we own, even in the COVID-19-exposed sectors. We do expect rating downgrade in a portion of our CMBS and CLO books but expect a much lower level of ultimate realized credit loss experience.
As Ted referenced, we have entered 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 in normal economic conditions at a capitalization level that is consistent with a 400% RBC ratio and allow it to drift downwards, if necessary, to approximately 320% RBC ratio due to either realized credit losses or temporary increases in required risk capital for ratings migrations. This level is intended to reflect a level 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 swing in capital adequacy of approximately 70 to 80 points of RBC whereby capital is doing what it is supposed to do at the low point of the economic cycle, that is absorb risk. As economic activity recovers over a 12- to 24-month period, we would expect to grow capital adequacy back up to the high 300s or the 400% RBC ratio level through a combination of earnings and balance sheet optimization actions while continuing to execute on our core business strategy.
On behalf of my colleagues and 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.
[Operator Instructions] We have a comment from the line of Dan Bergman.
I guess, first, in terms of the sales decline, is there any color you can provide on how much related to product competitiveness and pricing versus any drag from COVID and social distancing? Just given the timing of the sales process, just curious if you saw much of an impact from social distancing in mid- to late March on first quarter sales. And any details you can provide on how sales levels look in April and how much -- looked in April and how much of a drag we might expect going forward in the near term would be great.
This is Ron Grensteiner. I think -- thanks for the question, Dan. I think the first quarter results didn't really feel the impact from COVID-19 at that point yet. It wasn't until mid-March that it became a bigger factor. So our sales in the first quarter were more, I would say, due to our competitiveness. Pre-COVID-19, we made some changes in the fourth quarter in advance of some of our competitors. So as Anant 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.
Going forward, it's a tough situation, certainly, as everybody is trying to do social distancing. A lot of people are in some sort of shelter at home. So it's a tough environment. So it's hard to say what the second quarter will look like. When I look at the app count today compared to over the last few weeks, I'm hopeful that we've kind of reached bottom and that they somewhat stabilized. We have a very resilient group of core producers, as Anant talked about, that as the economy starts to open up again, hopefully, there -- some of those restrictions will help people get out and get back more to normal, whatever that is at that point.
Got it. 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 outlook for index credits and statutory earnings for the remainder of the year?
Dan, this is Ted. In regards to index credits going forward, if we stay at the current levels, index credits will be very low or minimal as we go forward over the next 3 to 4 -- over the next 4 quarters. In regards to statutory income, that will -- certainly will be a drag on statutory income as we go over that next 3 to 4 quarters. The first quarter index credits were fairly strong. They averaged about 2.4% because of the first 2 months or so of good market returns, but that won't repeat itself as we go forward. And we would certainly feel the impact on our level of statutory earnings and growth in organic capital generated from that.
[Operator Instructions] Our next comment or question comes from the line of Ryan Krueger from KBW.
I guess can you help us think about sources of capital generation? Kind of how long would you view yourself as having to rebuild capital back to the 400% RBC target if you were in a stressed environment? And then the avenues that you would likely expect to take to rebuild capital.
Sure. First of all, it'd probably be rebuilding over a 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 also in addition to that, we do have debt capacity within our current rating of approximately $400 million. Some of that could also be or could be issued in the form of a preferred stock where we would get -- a portion of that would still get a level of equity credit.
Can you give us any sense of normalized capital generation within the life subsidiary and sensitivity to sales?
And the one piece I did leave off of that, too, is -- the other piece is the lower amount of sales, obviously, will also release capital, too, and -- versus -- and again, we do our RBC estimate at each quarter and point in time using a trailing 12-month sales figure. So there'll be that. On average, if there was a normal statutory operating earnings, it's probably going to be around that $300 million, $250 million mark. And again, that's also going to be dependent on level of sales and other items as we go forward.
Our next comment comes from the line of Erik Bass from Autonomous Research.
Looking at results this year, 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, can you just talk about what impact these moves could have on assumptions and how that could play into future amortization rates?
Again, we're assuming -- 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 some or did back that down some in regards to what is assumed in our model. Certainly, we'll be looking -- we need to look over the long term. We have -- this is just a 1 quarter, 1 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 where we're currently at and where to our ultimate long-term assumption is. So certainly, yes, been significant movements in the market, but it's been 1 quarter. I think us and just as everybody will be closely watching that and looking at that, how that affects our overall long-term assumptions when we get to unlocking them in the third quarter. And just overall -- yes, overall -- remember, interest rates are part of it. The other side of it is how can we manage the overall spread through adjustments through cost of money also.
Got it. That was going to be my other question. And you mentioned, I think, Ted, a $15 million to $20 million drag on earnings, I think that -- for the next couple of quarters from higher reserve accretion. And I think there's also an ongoing benefit of around $7 million from an experience true-up. If so those numbers correct, so then should we think of roughly, call it, an $8 million to $13 million drag on earnings sequentially?
Correct.
[Operator Instructions] Your next question comes from the line of Pablo Singzon with JPMorgan.
This one is for Ted. So I know AEL does not write mortality risk, but I was curious if you could speak to how you see COVID-19-related excess mortality affecting your results? Would that be a positive or negative or neutral? And I guess with the in-force durations of the policies, does the death claims matter?
In regards to how mortality affects our book of business, under regulatory reserves, we carry quite redundant reserves. And those, and especially ones with the lifetime income benefit rider, those reserves exceed the level that would be paid out upon at death. So there is a slight positive to us in regards to an increase in mortality on our book of business.
Got it. And then the second question I had is for Jeff. So just focusing on the CLO portfolio. Short-term rates continue to go down. I was wondering, do you have any floors there in place that might mitigate pressure? Or should we start thinking about 0 as sort of the, I guess, absolute minimum the LIBOR rate is going to go to for you guys?
Yes. We do not have floors on -- well, we have floors of 0 on the CLO. So yes, I think from that standpoint, there's no outside hedges that protect us from further declines in LIBOR.
Our next comment comes from the line of John Barnidge from Piper Sandler.
What percent of your commercial real estate portfolio was in rental forbearance for April 1? And what's your expectation for May 1?
We had 1 -- we have 2 tenants or 2 loans that are on basically nonaccrual or haven't paid for the 1st of March. We are in process right now. We've got a couple that we have, and we're still too early. We're -- it usually takes 5 to 6 days to get information back from the servicers. 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 and 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 SVO 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 we'll come in and support some of our borrowers in regard to challenges they may have with tenants having difficulty paying rent when maybe their doors are closed.
And I think I'll add into the point that, John -- to Jeff's point -- this is Anant. What's really important on our commercial mortgage loan book, as Jeff mentioned in his comments, is that we're not in the large MSAs. So being in smaller MSAs, if you think of less urban density, even our strip retail exposure that we have, will actually likely get back to work sooner. Who knows how quickly things get back to work, but that's definitely something that's a positive in our book that we are looking at as we think of forbearance and items like that.
My other question, is there any way to dimension the average time between maybe first interaction and policy being sold and kind of that dovetails on not being in large MSAs, shelter in place is starting to lift.
Well, this is Ron. As far as the time of policy being sold, the old way, you'd have potentially a couple of different appointments. One is to get acquainted, do your fact-finding, find out where the pain is, so to speak. And then a second appointment would be make your recommendation on how you think you can help. And sometimes there's even a third appointment. So the whole process can last from 2 weeks to 4 months -- or not 4 months, 4 weeks, excuse me. That's kind of the old way.
The new way these days is a lot of our agents are being successful using Zoom 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 webinar or see an ad in Facebook or something like that, they're ones that are maybe apt to take action quicker. So these days, the sales cycle might be a little bit shorter actually than under the old way. Of course, then you always have to account for if there's a transfer of money from one financial institution to us, that takes anywhere from 10 days to 4 weeks.
Our next comment comes from the line of Alex Scott from Goldman Sachs.
So apologies if I missed this on the beginning of the call. But I just had a high-level question about spreads. When we think about what you're achieving in new money yields and then on the cost side, sort of some of the volatility that's in the market and the rating action that you're taking. I guess even just directionally, what -- how do you see that playing out in terms of the direction of spreads over the next 12 months and if there's any way to kind of quantify how many bps, up or down, that would be pushing it?
Alex, this is Ted. I mean there's a lot of moving parts right now, obviously. Yields, I think, once again, 1 quarter is not a trend. I think we're continuing, Jeff and his team are continuing to look for opportunities in place to proactively invest money. And so I think there will be opportunities out there, et cetera, and -- to be able to put the money to work at maybe a little bit more attractive rates than what we have been doing recently. Beyond that, on the cost and money side, we continue to have room to be able to take actions. It was approximately 63 basis points of room between where current crediting rates are and where our minimum guarantees were based upon, the week of April 17, I think, was the week we used in regards to pricing the options to do that calculation.
So certainly, we continue to have flexibility, I think, both 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 2.60 while our trendable spread was 2.53 this quarter. Again, we always assume there's going to be some level of prepayments impact that's going to be in there.
So I think, again, 1 quarter is not a trend. We're going to continue to look at the opportunities out there, both from adjusting our liability cost and also in regards to what we're doing in the investment portfolio. And as I said before, ultimately, we got to look out over a long period of time to -- and see as we come to our third quarter and adjust that.
Got it. All right. And then the second question I have is just on your credit ratings. I think they're generally at A minus at the opco level right now. I think 2 of the 3 are on negative outlook. But I appreciate the comments that were made around the RBC, in that they don't just look at it at a point in time but through a cycle and so forth. So I was just interested in how those conversations are going. And also, just if you can opine on the level of ratings that you think you need to be able to maintain to have it not impact the sales that you're able to achieve. Any color on all that would be great.
I'm going to start, Ted, and then you -- I'll start, Ted, and you chime in. Alex, in terms of the rating agency dialogue and how we think about things going forward, this core business that is in the independent agent channel is one where our reputation is. And sort of in my prepared comments, 75% of sales came from our loyal producers and the $1 million-plus category this quarter as well. That business, ratings are important, but reputation is equally, if not more, important. And we feel that we have the capital to withstand our current ratings. And actually, as we 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 remains there. This core business will operate at these rating levels or other rating levels as well. Let me answer it from that point of view. Ted, do you want to add in something?
No. Again, I think just in general, obviously just to reiterate, our conversations with the rating agencies really kind of mirror what we said here in the script in regards to a 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.
Yes. Maybe the best way to summarize it. We don't feel any pressure to our A minus rating at this point. We feel we have a path to better ratings over time. And as we retool this business, we'll have skills that allow us to grow faster in other areas where an A rating or A minus rating will be more important. This business, reputation matters the most.
[Operator Instructions] Your next comment comes from the line of Mark Hughes of SunTrust.
Ted, the additional lever reserve accretion, the $15 million to $20 million, I think you pointed out that's offset by $7 million in the true-up. Did the company benefit from the true-up in the first quarter?
Yes, we did because the rate -- as the rate decreases are coming through, that's flowing through the models just like they will come through on the policies that hit their anniversary dates in the second quarter.
Understood. And so the marginal impact or sequential impact in 2Q would be the additional reserve accretion, is that right, the extra $15 million to $20 million?
That's correct. That's correct because we had about average 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, now where the market is at, any -- going forward over the next multiple quarters, index credits are going to be very minimal or 0.
And then, Ron, I think one of the dynamics in the past have been when there was capital stress that certain competitors would exit the market or at least effectively do it by pulling back on their crediting rates. Have you seen anything like that this time around?
Mark, we've seen one. And I can't tell you the reason why, but Security Benefit Life has pulled out of the guaranteed income business. And so I think us and some of the other companies that are in that space will probably capture some of that business.
And our next question comes from the line of Pablo Singzon of JPMorgan.
This one is for Ted. Ted, could you speak to what happened with operating expenses this quarter? I think they were higher, whether you look at it sequentially or year-over-year. And I guess how are you thinking about that number going forward?
So sequentially, we were up, I think, $4.4 million. Approximately about $1.9 million of that $4.4 million were onetime expenses that won't be repeatable. After that, also what you should also look at is increase in our risk charges that we pay Hannover for the redundant reserve financing. I think that was up $0.5 million a quarter -- last quarter over this quarter.
Okay. And then the second question I had was for you or maybe Anant. So as you manage COVID from a capital perspective, how are you thinking about having access to capital today versus maybe at some point in the future? I guess like is having the [ credit ] facility something you're considering? Or would you basically rely on reinsurance or capital markets being opened down the road if you do need to tap them in the future?
Anant, do you want to take that one?
Okay. You start, and I'll add in. We're just dealing with being in different geographies, everyone. So Ted will start, and I'll add in.
Pablo, I think we're being proactive in looking at opportunities, and we'll continue to do that both from a reinsurance capital risk perspective and looking at what opportunities are out there assessing and also looking at what avenues within going to the market if needed was there and if there are reasons to our opportune times, too. So we're not sitting back. We are being proactive in thinking about that. And we'll continue to look at that as conditions materialize as we go through the next several quarters.
And the only thing I would add is that as we -- it's not just reinsurance or accessing the market to raise the right capital opportunistically. Also, as we look at our asset liability management as a team, there may be ways to optimize capital charges on the investment side, new or areas that we're evaluating. The points that I made about rating stability when we invest new money is an important one of the underlying portfolio. So I think that is an add-on to what Ted said.
There are no further comments at this time.
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