Fitch Affirms American Equity's Ratings; Outlook Stable

CHICAGO--()--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 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 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 Sept. 30, 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 notes that AEL's risky assets ratio is 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, 2013, the company reported an RBC ratio of 344%, up from 332% at year-end 2012. Management estimates its Sept. 30, 2014 RBC ratio to be 359%, and Fitch anticipates that the company's RBC ratio at year-end 2014 will be maintained above 300%.

AEL's financial leverage was approximately 34% at Sept. 30, 2014, down from a high of 43% at year-end 2010. Although the company's financial leverage has declined significantly in recent years, Fitch continues to consider this level to be high, and the primary reason for the extra notch between the parent company and subsidiary ratings. The company continues to reduce the amount of outstanding principal on its convertible notes in 2014.

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 $43 billion and equity of $2 billion at Sept. 30, 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 Sept. 30, 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' (September 2014);

--'Life Insurance (U.S.) Sector Credit Factors' (October 2012);

--'American Equity Investment Life Holding Company (And Insurance Operating Subsidiaries)' (September 2014).

Applicable Criteria and Related Research:

American Equity Investment Life Holding Company

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=751290

Life Insurance (U.S.) Sector Credit Factors

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686297

Insurance Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=756650

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=932995

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Contacts

Fitch Ratings
Primary Analyst
Bradley S. Ellis, CFA
Director
+1-312-368-2089
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
R. Andrew Davidson, CFA
Senior Director
+1-312-368-3144
or
Committee Chairperson
Mark E. Rouck, CPA, CFA
Senior Director
+1-312-368-2085
or
Media Relations
Brian Bertsch, +1 212-908-0549
brian.bertsch@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Bradley S. Ellis, CFA
Director
+1-312-368-2089
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
R. Andrew Davidson, CFA
Senior Director
+1-312-368-3144
or
Committee Chairperson
Mark E. Rouck, CPA, CFA
Senior Director
+1-312-368-2085
or
Media Relations
Brian Bertsch, +1 212-908-0549
brian.bertsch@fitchratings.com