Fitch Affirms American Equity's Ratings; Outlook Stable
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+'.
Комментарии