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 ratings list follows the
end of this release.
Fitch views AEL's chief credit strengths to be:
--A high credit quality bond portfolio;
--Good operating results;
--Adequate risk-adjusted capitalization;
--Strong competitive position in the fixed indexed annuity market.
Fitch considers AEL's bond portfolio to be of high credit quality,
although there has been a shift to lower quality, yet still investment
grade bonds in recent years. At March 31, 2012, U.S. Government
sponsored agencies accounted for approximately 15% of fixed income
securities and 98% of the portfolio was investment grade according to
NAIC standards. Given the composition of the investment portfolio, AEL
had comparably less investment related losses over the recent period of
challenging capital markets than many of its peers. As the composition
of AEL's portfolio continues to change as certain fixed maturity
securities are subject to call redemption, Fitch expects credit risk
will rise to levels more consistent with historical life insurance
AEILIC's statutory total adjusted capital increased 14% in 2011 to $1.7
billion. Fitch views AEILIC's NAIC risk based capital (RBC) ratio as
adequate for the rating category. For Dec. 31, 2011, RBC was 346%, up
from its year end 2010 level of 339%. Fitch anticipates that AEILIC's
2012 RBC ratio will be maintained above 300% as internally generated
capital will be partially offset by continued strong sales growth and
increased credit risk as the company continues the slow shift of its
portfolio allocation from federal agency securities to corporate bonds.
Based on the company's strong sales trends, Fitch believes that AEL may
need to manage sales growth and/or access reinsurance markets in the
future given the strain new FIA sales have on risk-based capital.
Fitch's primary rating concerns include:
--AEL's high financial leverage
--Increasing credit risk in AEL's investment portfolio;
--AEL's lack of diversification in revenue and earnings, as well as
--Above average exposure to interest rate risk.
AEL's financial leverage was 39% at March 31, 2012, which Fitch
considers high, and is the primary factor in the extra notch in the
company's IDR from its IFS rating. Fitch anticipates the company's
financial leverage will continue to gradually decline over the next
couple of years. Although the company does not have a stated maturity of
debt until September 2015, the company is exposed to a potential 'put'
of its 2024 and 2029 notes totaling $144 million on Dec. 15, 2014.
Fitch believes the credit quality of AEL's investment portfolio's will
continue to decline from its historically high level given the
significant amount of callable federal agencies securities redeemed in
the past two years and additional fixed income securities that are
becoming subject to call redemption in 2012. AEL has reinvested
redemption proceeds primarily in corporate bonds (largely rated 'A' and
'BBB') and commercial mortgages.
Fitch expects AEL's investment losses in 2012 to be comparable to losses
reported in 2011. In 2011, the company reported $19.4 million of other
than temporary impairments (OTTI) on its residential mortgage-backed
securities holdings, as well as $18.6 million in net realized losses
driven primarily by a $30.8 million increase in the company's allowance
for credit losses on commercial mortgages. Despite the increase relative
to 2010, Fitch views the level of AEL's investment losses in 2011 to be
manageable given the company's earnings and capital position.
AEL's above average interest rate risk reflects the company's focus on
spread based annuity products. The near-term concern is the ongoing low
interest rate environment, which will present challenges for the company
in terms of maintaining its interest rate spreads. This concern is
amplified somewhat by the company's dwindling, yet still significant
allocation to U.S. government agency callable securities. Although this
risk is declining as these bonds have been redeemed, the lower rates at
which the redemption proceeds have been reinvested have accelerated the
decline of the overall yield earned on the company's fixed income
portfolio. 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 currently exhibits strong protection in terms of
significant surrender charges to 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 $33.0 billion and equity of $1.4 billion at March 31, 2012.
AEILIC, the main operating subsidiary of AEL, is also headquartered in
West Des Moines and had statutory total adjusted capital of $1.7 billion
at Dec. 31, 2011.
The key rating triggers that could result in an upgrade include:
--Enhanced capitalization with RBC above 350% on a sustained basis;
The key rating triggers that could result in a downgrade include:
--A reduction in capitalization with RBC below 300%;
--A significant deterioration in operating results such that interest
coverage declines below 3x;
--Significant increase in lapse/surrender rates;
--Significant increase in credit related impairments in 2012;
--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
--Issuer Default Rating (IDR) at 'BB+';
--3.50% senior convertible debentures due 2015 at 'BB';
--5.25% senior convertible debentures due 2024 at 'BB';
--5.25% senior convertible debentures due 2029 at 'BB';
--Trust preferred securities at 'B+'.
American Equity Investment Life Insurance Company
--Insurer Financial Strength (IFS) at 'BBB+'.
American Equity Investment Life Insurance Company of New York
--IFS at 'BBB+'.
Additional information is available at 'www.fitchratings.com'.
The ratings above were unsolicited and have been provided by Fitch as a
service to investors.
Applicable Criteria and Related Research:
--'American Equity Investment Life Holding Company (And Insurance
(May 15, 2012);
--'Insurance Rating Methodology' (Sept. 22, 2011).
American Equity Investment Life Holding Company (And Insurance Operating
Insurance Rating Methodology
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Fitch RatingsPrimary AnalystBradley S. Ellis, CFA,
+1-312-368-2089DirectorFitch, Inc.70 W. Madison StreetChicago,
IL 60602orSecondary AnalystR. Andrew Davidson, CFA,
+1-312-368-3144Senior DirectororCommittee ChairpersonMark
E. Rouck, CPA, CFA, +1-312-368-2085Senior DirectororMedia
Relations:Brian Bertsch, +1-212-908-0549Email: firstname.lastname@example.org
Source: Fitch Ratings