A.M. Best Affirms Ratings of American Equity Investment Life Holding Company and Its Subsidiaries; Revises Outlook to Negative

OLDWICK, N.J.--(BUSINESS WIRE)--A.M. Best Co. has affirmed the financial strength rating of A- (Excellent) and issuer credit ratings (ICR) of “a-” of American Equity Investment Life Insurance Company (American Equity Life) (Des Moines, IA) and its subsidiary, American Equity Investment Life Insurance Company of New York (New York, NY). Concurrently, A.M. Best has affirmed the ICR of “bbb-” for American Equity Life’s parent, American Equity Investment Life Holding Company (AEL) (Des Moines, IA) (NYSE: AEL) and affirmed all debt ratings of AEL and American Equity Capital Trust V and VI. The outlook for all ratings has been revised to negative from stable. (See below for a detailed list of the companies and debt ratings.)

The affirmation of the ratings for American Equity Life continues to recognize its more than adequate level of risk-adjusted capitalization, consistently positive GAAP operating results, leading position in the fixed indexed annuity segment, favorable surrender charge protection in its annuity business and its good asset liability management program. This includes the hedging of risks associated with the fixed indexed annuity business and its overall business scale that was achieved over the past 10 years.

The negative outlook reflects AEL’s significant exposure to commercial mortgage loans relative to its statutory capital and surplus, the negative impact of AEL’s previously announced impairment losses on statutory surplus, a continuing high level of intangible assets attributed to increasing deferred acquisition costs and deferred sales inducements (DAC) and the potential challenges to manage the core fixed indexed annuity business in a volatile market. While the company’s commercial mortgage loan portfolio has not experienced any performance issues to date, A.M. Best notes that commercial mortgage loans are viewed as vulnerable to heightened financial risks given macroeconomic challenges surrounding financial markets, depressed real estate values in some sectors and the weakened business environment in the United States. In addition, spread widening has contributed to a growth in the unrealized loss position in AEL’s fixed income portfolio.

On a GAAP basis, AEL carries a large exposure to DAC relative to its GAAP equity. Although the majority of these intangible assets are insulated through surrender protection charges embedded in the indexed annuity contracts, A.M. Best believes there is uncertainty related to amortization of DAC assets due to the potential volatility of expected gross profits from investment and product margins.

Another challenge AEL faces is the potential impact of the proposed SEC Rule 151A, which would require registration of most indexed annuity products and the securities licensing of agents who sell these products.

The following debt rating has been affirmed:

American Equity Investment Life Holding Company—

-- “bbb-” on $260 million 5.25% senior unsecured convertible notes, due 2024

The following indicative ratings have been affirmed:

American Equity Investment Life Holding Company—

-- “bbb-” on senior unsecured debt

-- “bb+” on subordinated debt

-- “bb” on preferred stock

American Equity Capital Trust V and VI—

-- “bb” on trust preferred securities

Founded in 1899, A.M. Best Company is a global full-service credit rating organization dedicated to serving the financial and health care service industries, including insurance companies, banks, hospitals and health care system providers. For more information, visit www.ambest.com.