AM Best has affirmed the Financial Strength Rating (FSR) of A- (Excellent) and the Long-Term Issuer Credit Ratings (Long-Term ICR) of “a-” (Excellent) of American Equity Investment Life Insurance Company (AEILIC) and its subsidiaries, American Equity Investment Life Insurance Company of New York (Lake Success, NY) and Eagle Life Insurance Company, collectively referred to as AEL. Concurrently, AM Best has affirmed the Long Term ICR of “bbb-”(Good) of American Equity Investment Life Holding Company [NYSE: AEL] and its Long Term Issue Credit Ratings (Long-Terms IRs). The outlook of these Credit Ratings (ratings) is stable. All companies are domiciled in West Des Moines, IA, unless otherwise specified. (Please see below for detailed listing of the Long-Term IRs).
The ratings reflect AEL’s balance sheet strength, which AM Best assesses as adequate, as well as its strong operating performance, neutral business profile and appropriate enterprise risk management.
AEL’s risk-based capital, which is viewed currently as high quality, increased during 2020. However, going forward the group may see higher utilization of affiliated and unaffiliated reinsurance, along with a significant planned change in its investment strategy toward private debt, real estate and infrastructure assets, as part of a new business strategy known as AEL 2.0. The group is transitioning from a pure return-on-equity model to a multi-year recurring return-on-assets model, whereby other parties provide the required equity. The new strategy, if successful, should result in more diversified sources of earnings beyond spread-based earnings to include asset management fee income and longer-term potential reinsurance income. AEL publically has announced two reinsurance partners, Brookfield Asset Management Inc. (Brookfield) and Varde Partners, and these deals are expected to close in 2021. AEL’s portfolio is expected to become less liquid as a result of the revised strategy, although overall yields in the longer term are expected to improve. AEL’s current investment portfolio contains some credit risk, with a high percentage of collateralized loan obligations invested in triple-B tranches, an increase in below investment grade bonds and exposure to strip-retail commercial mortgage loan investments. However, these asset classes are performing well currently, with low levels of credit impairments. AM Best will continue to monitor these investments, along with AEL’s ability to execute its 2.0 strategy. Going forward, AM Best expects AEL to maintain sufficient risk-adjusted capital to support its overall balance sheet assessment. Holding company liquidity is viewed favorably, with financial leverage and interest coverage ratios within AM Best’s expectations.
AEL has a track record of profitable premium growth, but annuity deposits before coinsurance ceded decreased during 2020, primarily as a result of the pandemic. It will continue to face a challenging environment due to an increasingly highly competitive market. Operating performance in 2020, and so far in 2021, has been constrained by high levels of cash in anticipation of deployment of AEL’s 2.0 business strategy toward investments. The reinsurance deals with Brookfield and Varde Partners will provide additional annual ceding commissions for the next seven years plus an asset management fee from Brookfield, which is expected to free up at least $300 million of capital.
The group continues to maintain a strong market position in the increasingly competitive fixed-index annuity segment nationally, and is among one of the top market leaders in the independent marketing organization channel. While AEL’s business profile is neutral, it continues to remain concentrated given its focus on fixed-index annuity products and a declining overall market share position related to growth in the overall market from the bank and broker-dealer channels, of which the latter historically has been an underemployed channel for AEL. Overall, AEL’s distribution through independent marketing organizations remains highly concentrated. While the new AEL 2.0 business strategy is expected to change AEL’s business profile, it is still evolving as the business model expands toward reinsurance, asset management and efficient use of capital with planned reinsurance transactions.
The following Long-Term IRs have been affirmed with a stable outlook:
American Equity Investment Life Holding Company—
-- “bbb-” (Good) on $500 million 5% senior unsecured notes due 2027
-- “bb” (Fair) on $300 million 6.625% perpetual, non-cumulative preferred stock
-- “bb” (Fair) on $400 million 5.95% perpetual, non-cumulative preferred stock
The following indicative Long-Term IRs under the shelf registration have been affirmed with a stable outlook:
American Equity Investment Life Holding Company—
-- “bbb-” (Good) on senior unsecured debt
-- “bb+”(Fair) on subordinated debt
-- “bb” (Fair) on preferred stock
American Equity Capital Trust V and VI—
-- “bb” (Fair) on trust preferred securities
This press release relates to Credit Ratings that have been published on AM Best’s website. For all rating information relating to the release and pertinent disclosures, including details of the office responsible for issuing each of the individual ratings referenced in this release, please see AM Best’s Recent Rating Activity web page. For additional information regarding the use and limitations of Credit Rating opinions, please view Guide to Best’s Credit Ratings. For information on the proper use of Best’s Credit Ratings, Best’s Preliminary Credit Assessments and AM Best press releases, please view Guide to Proper Use of Best’s Ratings & Assessments.
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Senior Financial Analyst
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