CHICAGO--(BUSINESS WIRE)--Fitch Ratings affirmed the Issuer Default Rating (IDR) of American Equity Investment Life Holding Company (AEL) at 'BBB-'. Fitch has also affirmed the Insurer Financial Strength (IFS) ratings of AEL's insurance operating subsidiaries: American Equity Investment Life Insurance Company (AEILIC), American Equity Investment Life Insurance Company of New York and Eagle Life Insurance Company at 'BBB+'. The Rating Outlooks are Stable. A full list of rating actions follows at the end of this release.
KEY RATING DRIVERS
The affirmation of AEL's ratings reflects the company's low risk bond portfolio, continued solid operating results, strong risk-adjusted capitalization, reasonable financial leverage and robust competitive position in the fixed indexed annuity market. The ratings also reflect AEL's above-average exposure to interest rate risk and lack of diversification in earnings and distribution.
Risks associated with AEL's lack of diversification were brought into focus in April 2016 when the U.S. Department of Labor (DOL) announced new rules that include AEL's primary product, fixed indexed annuities, in the Best Interest Contract Exemption (BICE). Fitch believes that when the new rules are implemented in 2017, they will increase the administrative burden for affected companies, require more disclosure, increase litigation risk, change the way affected products are sold and could have a significant adverse effect on AEL's sales of FIAs.
AEL's financial leverage and interest coverage metrics have shown significant improvement in recent years. The company's financial leverage was approximately 27% at June 30, 2016, down from a high of 43% at year-end 2010. However, Fitch expects the company's entrance into a $100 million term loan late last month to modestly increase financial leverage at Sept. 30, 2016. Likewise, GAAP interest coverage improved to 8.3x in 2015 from 5.0x in 2012 on a combination of improved earnings and lower interest expense. Interest coverage declined to approximately 6.4x in first half 2016 due to primarily to a first quarter 2016 DAC unlocking charge related to a reduction in the company's investment spread assumptions.
Fitch considers AEL's bond portfolio to be of above-average credit quality. At June 30, 2016, 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 2015, 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 52%, which is unchanged from the prior year-end and is significantly below the industry average. Fitch considers AEL's risky assets ratio to be significantly overstated due to funds withheld reinsurance agreements.
Fitch considers AEL's risk-adjusted capitalization to be strong as measured by Fitch's Prism capital model, and the NAIC risk-based capital (RBC) ratio of AEL's primary insurance subsidiary, AEILIC, to be above median guidelines for the company's rating category, but reasonable for the company's business profile. At Dec. 31, 2015, the company reported an RBC ratio of 336%, down from 372% at year-end 2014. The company's capital and surplus position benefited in August 2016 from a parent company capital contribution of $135 million representing proceeds from the physical settlement of forward sales agreements related to the company's 2015 common stock offering.
AEL's above-average interest rate risk reflects the company's focus on spread-based annuity products, which are vulnerable to both sustained low rates and upward interest rate shocks. Despite the company's strong recent track record in maintaining its aggregate interest rate spread, a 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 a material 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, 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 $53.7 billion and equity of $2.6 billion at June 30 2016. AEILIC, the main operating subsidiary of AEL, is also headquartered in West Des Moines and had statutory total adjusted capital of $2.6 billion at June 30, 2016.
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 a 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 stable or improved operating results and investment quality.
The key rating triggers that could result in a downgrade include:
--A reduction in capitalization that results in a Prism score in the low range of Adequate and RBC below 300%;
--Sustained deterioration in operating results such that interest coverage is below 3x;
--Significant increase in lapse/surrender rates;
--Financial leverage above 40%.
FULL LIST OF RATING ACTIONS
Fitch has affirmed the following ratings with a Stable Outlook:
American Equity Investment Life Holding Company
--IDR at 'BBB-';
--6.625% senior unsecured notes due 2021 at 'BB+';
--Trust preferred securities at 'BB-'.
American Equity Investment Life Insurance Company
American Equity Investment Life Insurance Company of New York
Eagle Life Insurance Company
--IFS at 'BBB+'.
Additional information is available on www.fitchratings.com
Applicable Criteria
Insurance Rating Methodology (pub. 15 Sep 2016)
https://www.fitchratings.com/site/re/887191
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1012753
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1012753
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTPS://WWW.FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT 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.
Copyright © 2016 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch's factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch's ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed.
The information in this report is provided "as is" without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers.
For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001.