CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed the Issuer Default Rating (IDR) of American Equity Investment Life Holding Company (AEL) at 'BB+' and the Insurer Financial Strength (IFS) ratings of its insurance operating subsidiaries: American Equity Investment Life Insurance Company (AEILIC) and American Equity Investment Life Insurance Company of New York, at 'BBB+'. The Rating Outlook is Stable. A full list of ratings follows at the end of this release.
KEY RATING DRIVERS
The affirmation reflects high credit quality within AEL's bond portfolio, continued good operating results, adequate risk-adjusted capitalization and strong competitive position in the fixed indexed annuity market. The rating also reflects AEL's high financial leverage, above-average exposure to interest rate risk and lack of diversification in earnings and distribution.
Fitch considers AEL's bond portfolio to be of above-average credit quality. At March 31, 2014, 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 2013, 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 67%, up modestly from 65% year-end 2012, but moderately below the industry average.
Fitch views the NAIC risk-based capital (RBC) ratio as of AEL's primary insurance subsidiary, AEILIC, to be relatively stable over the past five years and adequate for the rating category. At Dec. 31, 2013, the company reported an RBC ratio of 344%, up from its 332% at yearend 2012. Fitch anticipates that AEILIC's 2014 RBC ratio will be maintained above 300% as internally generated capital will be partially offset by continued strong sales growth.
AEL's financial leverage was approximately 37% at March 31, 2014, down from a recent high of 43% at yearend 2010. Fitch considers this level of financial leverage to be high, and is the primary reason for the extra notch between the parent company and subsidiary ratings. AEL issued $400 million of eight-year senior notes in July 2013, with the majority of proceeds expected to be used to fund the redemption of a portion of existing convertible debt on the company's balance sheet. The company continued the reduction of outstanding principal on the convertible notes in April 2014.
AEL's above-average interest rate risk reflects the company's focus on spread-based annuity products, particularly fixed indexed annuities. The near-term concern is the ongoing low interest rate environment, which is challenging the company and its peers in terms of maintaining 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 $40.5 billion and equity of $1.7 billion at March 31, 2014. AEILIC, the main operating subsidiary of AEL, is also headquartered in West Des Moines and had statutory total adjusted capital of $2.1 billion at March 31, 2014.
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 its 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 good 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;
--Unexpected spike in credit related impairments;
--Financial leverage above 50%.
The key rating triggers that could result in a narrowing of notching between the IDR of AEL and the IFS of AEILIC include:
--A sustainable decline in financial leverage below 30%;
--Sustained GAAP EBIT-based interest coverage above 8x.
Fitch has affirmed the following ratings with a Stable Outlook:
American Equity Investment Life Holding Company
--IDR at 'BB+';
--3.500% senior convertible debentures due 2015 at 'BB';
--6.625% senior unsecured notes due 2021 at 'BB';
--5.250% senior convertible debentures due 2029 at 'BB';
--Trust preferred securities at 'B+'.
American Equity Investment Life Insurance Company
--IFS at 'BBB+'.
American Equity Investment Life Insurance Company of New York
--IFS at 'BBB+'.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Insurance Rating Methodology' (November 2013);
--'Life Insurance (U.S.) Sector Credit Factors' (October 2012);
--'American Equity Investment Life Holding Company (And Insurance Operating Subsidiaries)'(June 2013).
Applicable Criteria and Related Research:
Insurance Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=723072
Life Insurance (U.S.) Sector Credit Factors
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686297
American Equity Investment Life Holding Company
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=708948
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=836307
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