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
AEL's financial leverage and interest coverage metrics have shown significant improvement in recent years. The company's financial leverage was approximately 27% at
Fitch considers AEL's bond portfolio to be of above-average credit quality. At
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
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
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-'.
--IFS at 'BBB+'.
Additional information is available on www.fitchratings.com
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Source: Fitch Ratings