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Fitch Affirms American Equity's Ratings; Outlook Stable
November 16, 2015 / 7:24 PM / 2 years ago

Fitch Affirms American Equity's Ratings; Outlook Stable

(The following statement was released by the rating agency) CHICAGO, November 16 (Fitch) Fitch Ratings has affirmed the Issuer Default Rating (IDR) of American Equity Investment Life Holding Company (AEL) at 'BBB-'. Fitch has also affirmed the Insurer Financial Strength (IFS) ratings of AEL's insurance operating subsidiaries: American Equity Investment Life Insurance Company (AEILIC), American Equity Investment Life Insurance Company of New York, and Eagle Life Insurance Company at 'BBB+'. The Rating Outlooks are Stable. A full list of ratings follows at the end of this release. KEY RATING DRIVERS The affirmation of AEL's ratings reflects high credit quality within AEL's bond portfolio, continued good operating results, adequate risk-adjusted capitalization and the company's strong competitive position in the fixed indexed annuity market. The ratings also reflect AEL's relatively high, albeit declining, financial leverage, above-average exposure to interest rate risk and lack of diversification in earnings and distribution. AEL's financial leverage and interest coverage metrics have shown significant improvement in recent years. The company's financial leverage was approximately 27% at Sept. 30, 2015, down from a high of 43% at year-end 2010. Likewise, GAAP interest coverage has improved to 8.2x in the first nine months of 2015 from 5.0x in 2012, and Fitch expects interest coverage to remain above 8.0x for full-year 2015 on a combination of improved earnings and lower interest expense. Fitch considers AEL's bond portfolio to be of above-average credit quality. At Sept. 30, 2015, the company's investment portfolio was constructed primarily of investment-grade fixed income securities. A high level of liquidity in the company's bond portfolio is supported by an above-average allocation to publicly traded bonds. At year-end 2014, the company's surplus exposure to risky assets (which Fitch considers to be such investments as below investment-grade bonds, troubled real estate, unaffiliated common equity and other similar assets) was 52%, which is significantly below the industry average. Fitch considers AEL's risky assets ratio to be significantly overstated due to funds withheld reinsurance agreements. Fitch views the NAIC risk-based capital (RBC) ratio of AEL's primary insurance subsidiary, AEILIC, as relatively stable over the past five years and adequate for the rating category. At Dec. 31, 2014, the company reported an RBC ratio of 372%, up from 344% at year-end 2013. AEL's above-average interest rate risk reflects the company's focus on spread-based annuity products, particularly fixed indexed annuities. Despite the company's strong recent track record in maintaining its aggregate interest rate spread, the near-term concern is the ongoing low interest rate environment, which continues to challenge the life insurance and annuity sector's ability to maintain interest rate spreads. From a longer-term perspective, as AEL's book of business matures, the occurrence of a rapid increase in interest rates could have an adverse effect on its financial position, as it could result in a sharp increase in surrenders while the value of its largely fixed-rate investments decline in market value. Positively, Fitch notes that AEL's book of business continues to exhibit strong protection in terms of significant surrender charges which help offset the cost to the company of early policy terminations. AEL is headquartered in West Des Moines, Iowa and reported total GAAP assets of $47.1 billion and equity of $2.1 billion at Sept., 30 2015. AEILIC, the main operating subsidiary of AEL, is also headquartered in West Des Moines and had statutory total adjusted capital of $2.4 billion at June 30, 2015. RATING SENSITIVITIES The ability of AEL to achieve a higher IFS rating is somewhat constrained by the company's limited diversity of earnings and cash flow given a heavy focus on fixed indexed annuities. This constraint could be overcome by the following: --Enhanced capitalization with RBC above 350% on a sustained basis; --Financial leverage below 25%; --Continued stable or improved operating results and investment quality. The key rating triggers that could result in a downgrade include: --A reduction in capitalization with RBC below 300%; --Sustained deterioration in operating results such that interest coverage is below 3x; --Significant increase in lapse/surrender rates; --Financial leverage above 40%. FULL LIST OF RATING ACTIONS Fitch has affirmed the following ratings with a Stable Outlook: American Equity Investment Life Holding Company --IDR at 'BBB-'; --6.625% senior unsecured notes due 2021 at 'BB+'; --Trust preferred securities at 'BB-'. Fitch has also affirmed the following with a Stable Outlook: American Equity Investment Life Insurance Company American Equity Investment Life Insurance Company of New York Eagle Life Insurance Company --IFS at 'BBB+'. Contact: Primary Analyst Bradley S. Ellis, CFA Director +1-312-368-2089 Fitch Ratings, Inc. 70 W. Madison Street Chicago, IL 60602 Secondary Analyst Tana M. Higman Director +1-312-368-3122 Committee Chairperson Mark E. Rouck, CPA, CFA Senior Director +1-312-368-2085 Media Relations: Hannah James, New York, Tel: + 1 646 582 4947, Email: Additional information is available on Applicable Criteria Insurance Rating Methodology (pub. 16 Sep 2015) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here _id=994175 Solicitation Status here Endorsement Policy here ail=31 ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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