A.M. Best reiterated the issuer credit ratings (ICR) of American Equity Investment Life Holding Company (AEL). Concurrently, it affirmed the financial strength rating of A- (Excellent) and ICR of “a-” of American Equity Investment Life Insurance Company and its subsidiaries, American Equity Investment Life Insurance Company of New York and Eagle Life Insurance Company. The outlook remains stable.
The rating affirmations came on the back of American Equity’s solid market position. The company is one of the top three leading providers of fixed indexed annuities (FIA) by market share. The company’s earnings have been driven by favorable premium trends and interest rate margins. It also has a solid risk-adjusted capitalization. Though the company’s debt level is high yet its financial leverage and interest coverage ratios are within A.M. Best’s standards and expected to improve once its outstanding convertible notes are redeemed or mature.
However, American Equity’s concentration on FIAs with modest product diversification, increased competition, low interest rate environment and potential for higher derivative cost from equity market volatility that affect its operating results weigh on its positives.
Though a rating upgrade is unlikely given the company’s concentrated business and interest rate sensitive reserve profile, the ratings are subject to downgrade. If net premiums written or interest rate margins declines, risk-adjusted capitalization deteriorates or market position weakens, the ratings could be downgraded.
Rating affirmations or upgrades from credit rating agencies play an important part in retaining investor confidence in the stock as well as in maintaining credit worthiness in the market. On the other hand, rating downgrades damage business, apart from increasing costs of future debt issuances. We believe that strong ratings will help American Equity retain investor confidence and help it write more businesses going forward.
American Equity carries a Zacks Rank #3 (Hold).
Other Stocks to Consider
Better-ranked life insurers include Lincoln National Corporation (LNC), Protective Life Corporation (PL) and StanCorp Financial Group Inc. (SFG). All these stocks sport Zacks Rank #2 (Buy).
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