Fitch Affirms American Equity's Ratings and Removes Watch Negative; Outlook Stable

NEW YORK--(BUSINESS WIRE)--

Fitch Ratings has affirmed the Issuer Default Rating (IDR) of American Equity Investment Life Holding Company (AEL) at 'BB+' and the Insurer Financial Strength (IFS) ratings at 'BBB+' for its insurance operating subsidiaries, American Equity Investment Life Insurance Company (AEILIC) and American Equity Investment Life Insurance Company of New York. Fitch has also removed the ratings from Rating Watch Negative. The Rating Outlook is Stable. A detailed ratings list follows the end of this release.

Today's rating action follows AEL's recent announcement that the company has resolved the Wells Notice with the U.S. Securities and Exchange Commission (SEC), which was issued in May 2009 to AEL's Chairman David Nobel and its CEO and President Wendy Waugaman in connection with certain disclosures regarding transactions involving AEL and American Equity Investment Service Company. The resolution has no financial penalty for AEL and does not result in a change in leadership, which were two concerns of Fitch's when it placed the ratings on Watch Negative.

Fitch views AEL's chief credit strengths to include:

-- A high credit quality bond portfolio;

-- Improved operating performance;

-- Adequate statutory capital for the rating.

Fitch views AEL's bond portfolio to be of high credit quality at year-end 2009. U.S. Government sponsored agencies accounted for 37% of fixed income securities and 97% of the portfolio was investment grade according to NAIC standards. Given the composition of the investment portfolio, AEL had comparably less investment related losses in 2009 than many of its peers. Although the composition of AEL's portfolio has changed in 2009 and will continue to change as certain fixed maturity securities are subject to call redemption, Fitch believes AEL will have some advantages to reinvestment with 20/20 hindsight in this economic environment to avoid riskier asset classes and sectors as well as to participate in good-quality spread opportunities. However, even with this potential advantage, Fitch still expects credit risk will rise to levels more consistent with historical life insurance industry averages, as measured by below investment grade (BIG) securities to total adjusted capital (TAC). AEL's BIG/TAC is estimated at 34% at year-end 2009 versus the industry average of 61% at year-end 2008.

Fitch also believes that AEL's operating earnings have benefited in this economic environment. Sales of its fixed indexed annuity (FIA) products have been strong as consumers have veered away from variable annuity products. In addition, spreads on AEL's account values have widened given higher investment yields and lower average crediting rates. Fitch expects some of these trends will continue into 2010, which should minimize earnings and capital volatility over the near term. Additional strengths include AEILIC's strong position in the FIA market and strong servicing reputation with its chosen distribution net work, national marketing organizations (NMO).

AEILIC's statutory total adjusted capital increased 18% in 2009 to $1.2 billion. Fitch views AEILIC's year-end 2008 NAIC risk-based capital (RBC) ratio of 337% as adequate for the rating category, but recognizes it was a meaningful decline from 426% at year-end 2007, albeit Fitch recognizes the 2007 RBC was unusually high and well above management's 300% stated target. Fitch attributes much of the change in RBC to higher asset charges given the shift in asset mix as well as an increase in below investment grade securities (up to 3.3% at year-end 2009 from less than 1% in 2007). Fitch expects an increase in below investment grade securities to continue to put pressure on AEILIC's RBC ratio in 2009, but also anticipates AEILIC to maintain an RBC above 300% by year-end 2009. In order to do so, AEL may need to manage sales growth given the strain new FIA sales have on RBC. AEL's new commission structure should help to relieve some pressure as well. Historically, AEL has relied on access to the capital markets to support sales capacity. However, access may not be available in today's challenging economic environment, which does limit AEL's financial flexibility, in Fitch's view.

Fitch's rating concerns include:

-- AEL's lack of diversification in revenue and earnings, as well as distribution;

-- Increased credit risk in AEL's investment portfolio over the next couple of years, particularly commercial mortgage loans, in a difficult economic environment;

-- A spike in interest rates and surrender rates.

Fitch's concern with AEL's lack diversification is heightened given the SEC's 151A ruling for the treatment of FIAs as securities. However, if the ruling is not overturned beforehand (the ruling is currently on appeal), AEL will have until what now looks to be January 2013 to accommodate for the new regulations. Fitch believes there is risk to current level sales and profitability while the company undergoes any necessary transition.

Fitch believes that AEL's investment portfolio's credit quality will deteriorate from its historically high level given that some of the company's fixed income securities will become subject to call redemption in 2010. AEL has invested new money primarily in corporate bonds (largely rated 'A' and 'BBB') and RMBS securities, which could give rise to higher investment losses than Fitch's expectations. Additionally, Fitch is concerned that AEL may experience higher-than-expected investment losses given its above-average investment exposure to commercial real estate (CRE) related assets, which primarily consists of directly placed commercial mortgage loans and represents over 16% of total invested assets as of year-end 2009.

Like many fixed annuity books of business, AEL's primary business risk is to a spike in interest rates concurrent with increased surrender rates. In Fitch's opinion, interest rate risk is AEILIC's chief balance sheet risk, as the market values of its assets and liabilities are sensitive to changes in interest rates. This concern is amplified by AEILIC's investment portfolio's significant allocation to U.S. government agency callable securities, which raises the level of interest rate sensitivity as well as reinvestment risk, albeit this risk is softening as more agency bonds get called. Fitch also recognizes that AEILIC has made improvements in its investment management capabilities and asset liability management (ALM) program in recent years. Additionally FIAs include product features such as surrender charges and terms that are designed to limit withdrawals, and thus help protect against reinvestment risk.

Future credit considerations:

-- Fitch would consider revising AEL's ratings or Outlook if other than temporary impairments from AEL's investment portfolio began to contribute more-than-expected volatility to earnings and capital than what Fitch considers reasonable at the current rating category.

-- Fitch would also expect downward pressure on AEL's ratings if AEL were not able to react appropriately to changes in the regulatory environment for the sales of FIA products, particularly with respect to Rule 151A.

AEL is headquartered in Des Moines, Iowa and had reported total GAAP assets of $21.3 billion and equity of $754.6 million at Dec. 31, 2009. AEILIC, the main operating subsidiary of AEL, is also headquartered in Des Moines and had total capital and surplus of $1.193 billion at Dec. 31, 2009.

Fitch has affirmed the following ratings with a Stable Outlook:

American Equity Investment Life Holding Company

--Issuer Default Rating (IDR) at 'BB+';

--5.25% senior convertible debentures due 2024 at 'BB';

--5.25% senior convertible debentured due 2029 at 'BB';

--Trust preferred securities at 'B+'.

American Equity Investment Life Insurance Company

--Insurer Financial Strength (IFS) at 'BBB+'.

American Equity Investment Life Insurance Company of New York

--IFS at 'BBB+'.

These rating actions reflect the application of Fitch's current criteria which is available on Fitch's web site at 'www.fitchratings.com' and specifically include:

'Insurance Rating Methodology', dated Dec. 29, 2009.

'Life Insurance Ratings Criteria', dated March 2, 2007.

Additional information is available at 'www.fitchratings.com'.

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