September 6, 2013 / 9:08 PM / 4 years ago

Fitch Affirms American Equity's Ratings; Outlook Stable

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(The following statement was released by the rating agency) CHICAGO, September 06 (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, 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 June 30, 2013, 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 and has continued to decline during 2013. Fitch views the NAIC risk-based capital (RBC) ratio as of AEL's primary insurance subsidiary, 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 place on risk-based capital. AEL's financial leverage was approximately 32% at June 30, 2013, which was down from 36% at Dec. 31, 2012, but is considered by Fitch to be high, and is the primary reason for the extra notch between the company's IDR and its IFS rating. 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 debt on the company's balance sheet. Although Fitch expects the company's recent debt issuance to drive a modest increase in financial leverage in the near term, a resumption of the downward trend over the past few years in the company's financial leverage could have a favorable effect on the company's debt ratings. 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. This concern has historically been amplified somewhat by AEL's allocation to U.S. government agency callable securities. 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 $37.3 billion and equity of $1.4 billion at June 30, 2013. AEILIC, the main operating subsidiary of AEL, is also headquartered in West Des Moines and had statutory total adjusted capital of $1.8 billion at June 30, 2013. 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%; --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+'; --3.500% 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+'. 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'. Applicable Criteria and Related Research: --'Insurance Rating Methodology' (August 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: American Equity Investment Life Holding Company here Life Insurance (U.S.) Sector Credit Factors here Insurance Rating Methodology here Additional Disclosure Solicitation Status 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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