September 21, 2017 / 6:27 PM / a year ago

Fitch Affirms American Equity's Ratings; Outlook Stable

(The following statement was released by the rating agency) CHICAGO, September 21 (Fitch) Fitch Ratings has affirmed the 'BBB+' Insurer Financial Strength (IFS) ratings of American Equity Investment Life Holding Company's (AEL) 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 the same time, Fitch has affirmed the Issuer Default Rating (IDR) of AEL 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 strong position in the fixed indexed annuity market (FIA), strong capitalization and leverage, and high quality investment portfolio. The ratings also reflect above-average business concentration, as well as interest rate risk associated with AEL's focus on FIA's. AEL's business is concentrated in the sale of FIAs through the independent agent distribution channel. Fitch believes AEL possesses well-established distribution relationships and has achieved significant operating scale in the FIA market. However, the company is exposed to business concentration risk due to its narrow product focus as changes in the competitive, regulatory and legal environment could negatively impact the demand for FIA products. Further, AEL's high concentration in fixed annuities results in above-average exposure to interest rate risk, particularly in the current low rate environment which has led to spread compression over recent years. From a longer-term perspective, a rapid increase in market rates could lead to increased disintermediation despite very strong surrender protection on AEL's annuity book. The anticipated full implementation of the Department of Labor's (DOL) fiduciary rule, and any changes to either the final applicability date or the language of the final rule would most likely have a greater impact on AEL relative to more diversified peers given the company's concentration in FIAs. While Fitch believes that many of the costs associated with the implementation of the rule have already been incurred, FIA sales continue to lag previous years and the final impact on AEL's primary distribution channel remains to be seen. Full implementation of the rule is not anticipated until at least 2019, and Fitch considers the uncertainty around the final form of the rule and its impact on the industry to be a credit negative for AEL. Fitch considers AEL's risk-adjusted capitalization to be good as measured by both Fitch's Prism capital model, and the NAIC risk-based capital (RBC) ratio of AEL's primary insurance subsidiary, AEILIC. Capital continues to be above median guidelines for the company's rating category, but reasonable for the company's business profile. At Dec. 31, 2016, the company reported an RBC ratio of 342%, up from 336% at year-end 2015. AEL's financial leverage has shown significant improvement in recent years. The company's financial leverage was approximately 27% at June 30, 2017, as compared to 28% at yearend 2016, after taking into account the impact from the refinancing of $400 million of senior notes due in 2021 in early July 2017 and the retirement of an outstanding term loan in June 2017. Financial leverage is expected to continue to improve over the near to intermediate term. Fitch considers AEL's bond portfolio to be of above-average credit quality. At June 30, 2017, the company's investment portfolio was constructed primarily of investment-grade fixed income securities. At year-end 2016, 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 65%, which is elevated from the prior year-end but significantly below the industry average and peers. Fitch considers AEL's risky assets ratio to be overstated due to funds withheld reinsurance agreements. 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 375%, and a PRISM score well into the Strong category on a sustained basis --Financial leverage below 25%; --Continued stable or improved operating results and investment quality. The key rating sensitivities 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 35%. FULL LIST OF RATING ACTIONS Fitch has affirmed the following ratings: American Equity Investment Life Holding Company --IDR at 'BBB-'; --5.00% senior unsecured notes due 2027 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+'; Contact: Primary Analyst Douglas R. Baker Associate Director +1-312-368-3207 Fitch Ratings, Inc. 70 W Madison St. Chicago, IL 60602 Secondary Analyst Bradley S. Ellis, CFA Director +1-312-368-2089 Committee Chairperson Mark E. 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