Fitch Affirms American Equity's Ratings; Outlook Stable

Fri Apr 12, 2013 2:25pm EDT

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(The following statement was released by the rating agency) CHICAGO, April 12 (Fitch) 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 rating list is shown below. KEY RATING DRIVERS The affirmation reflects high credit quality within AEL's bond portfolio, good operating results, adequate risk-adjusted capitalization and strong competitive position in the fixed indexed annuity market. The rating also reflects AEL's high, albeit declining 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 Dec. 31, 2012, 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. The company's investment portfolio has historically been significantly exposed to callable U.S. government-sponsored agency securities, which shortened the option-adjusted duration of the company's assets and increased the company's exposure to reinvestment rate risk. This exposure was reduced considerably in 2012. Fitch views the NAIC risk based capital (RBC) ratio as of AEL's primary insurance subsidiary, American Equity Investment Life Insurance Company (AEILIC), to be adequate for the rating category. For Dec. 31, 2012, RBC was 332%, down from its year end 2011 level of 346%. Fitch anticipates that AEILIC's 2013 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 a shift in 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 further access reinsurance markets in the future given the strain new fixed indexed annuity sales have on risk-based capital. AEL's financial leverage was 36% at Dec. 31, 2012, which is down from 39% at Dec. 31, 2011, but is considered high by Fitch, 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, it is exposed to a potential 'put' of its 2024 and 2029 notes totaling $144 million on Dec. 15, 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 in terms of maintaining its interest rate spreads. This concern has been amplified somewhat by its dwindling, yet still significant allocation to U.S. government agency callable securities. Although this risk has declined in 2012 as the company limited the reinvestment of redemption proceeds in such securities, Fitch believes that the lower rates at which the redemption proceeds have been reinvested or held in cash equivalents 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 $35.1 billion and equity of $1.7 billion at Dec. 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, 2012. RATING SENSITIVITIES 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 sustained deterioration in operating results such that interest coverage is below 3x; --Significant increase in lapse/surrender rates; --Inability to maintain sufficient parent company liquidity to fund any potential forced repurchase of outstanding notes payable; --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+'; --3.50% 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 --IFS at 'BBB+'. American Equity Investment Life Insurance Company of New York --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 R. Andrew Davidson, CFA Senior Director +1-312-368-3144 Committee Chairperson Mark E. Rouck, CPA, CFA Senior Director +1-312-368-2085 Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549, Email: brian.bertsch@fitchratings.com. 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: --'Insurance Rating Methodology' (Jan. 11, 2013); --'Life Insurance (U.S.) Sector Credit Factors' (Oct. 9, 2012); --'American Equity Investment Life Holding Company (And Insurance Operating Subsidiaries)'(May 15, 2012). Applicable Criteria and Related Research Insurance Rating Methodology — Amended here Life Insurance (U.S.) Sector Credit Factors here American Equity Investment Life Holding Company (And Insurance Operating Subsidiaries) here 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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