Insurers May Be in for More Misery (Update)

Ms. Gannon inaccurately states that American Equity Investment Life Insurance "lost $231 million on its call options, intended to hedge interest payouts, during the six months ending June 30." The options held by American Equity during the reported time frame experienced a decrease in fair value, which in turn lowers the amount of interest crediting on index strategies by the same amount.

This figure represents an unrealized asset valuation decrease with a corresponding offset in liabilities -- in the amount of interest crediting applied to its contracts. In other words, if the index does not increase during the applicable measured time frame, the option held by the company will not produce a return, which in turn results in zero crediting on a contract for that applicable time period. A policyholder who receives a zero credit does not lose any premium or interest credited in prior contract years; he or she simply receives no additional interest for the year the index has declined.

Ms. Gannon also states that American Equity "also reported $42 million paid out primarily on contracts with fixed-rate options and minimum guaranteed interest, which was five times the $7.8 million it paid out based on appreciate of underlying indices." The $42 million referenced in American Equity's 10Q represents interest which was primarily credited on the fixed-rate strategy portions of our indexed annuities.

A very small portion of this figure represented interest crediting solely do to contract minimum guarantee requirements. The $7.8 million represents interest credited to indexed strategy portions of our contracts, and reflects the fact that more contract holders moved funds from index strategies to the fixed strategy. There is no other relationship between these two figures other than to show that a total of just under $50 million was credited to annuity contracts in the way of interest.