American Equity Investment Life Outlook Revised To Negative Following Asset Stress Test; Ratings Affirmed

  • AEL's credit losses could be elevated relative to its modest capital redundancy at the 'A' level, based on our incremental asset stress test focused on vulnerable corporate asset classes.
  • We are revising our outlook on AEL to negative from stable and affirming our ratings.
  • The ratings affirmation reflects management's commitment to improve capitalization and our belief that the company can maintain its solid FIA position despite tough market conditions.
  • The negative outlook indicates our expectation for credit deterioration in AEL's general account portfolio and possible challenges to replenish capital in the immediate term under current stressed market conditions.
NEW YORK (S&P Global Ratings) March 26, 2020--S&P Global Ratings said today it revised its outlook on American Equity Investment Life Insurance Co. and holding company American Equity Investment Life Holding Co. (collectively, AEL) to negative from stable. At the same time, we affirmed our 'A-' financial strength and long-term issuer credit ratings on American Equity Investment Life Insurance Co. and our 'BBB-' long-term issuer credit rating on American Equity Investment Life Holding Co.
The outlook revision follows our incremental asset stress test for our rated North American life insurers (see "Assessing The Top Risks COVID-19 Poses To North American Life Insurers"). Our analysis mainly focused on transition risk from 'BBB' to 'BB', with some additional assumptions for sectors most affected by social distancing as well as energy given its own crisis.
In our view, elevated investment losses could compromise AEL's capital adequacy, which already was modest at the 'A' level as of year-end 2019. AEL has historically held modest capital buffers at the 'A' level, under our capital model, with its capital consumption needs in light of the resurgence of fixed indexed annuity (FIA) sales for the industry in 2019.
AEL made a concerted effort to improve its capital position through several actions in 2019, including a $400 million preferred issue, increased use of reinsurance, a $50 million infusion from the holding company into the operating company, and the sale of certain lower-rated securities. Likewise, AEL holds about $225 million at the holding company level for general corporate purposes, which we believe can be swiftly downstreamed to the operating companies to improve capitalization.
Nonetheless, mounting market dislocation adds uncertainty regarding AEL's ability to replenish capital in the immediate term. We believe management is committed to improving capitalization, but any actions the company might take to shore up capital will still be subject to execution risk in an uncertain market.
The negative outlook on AEL indicates that we expect the company to be pressured to maintain capital redundancy at the 'A' level based on expectations for higher-than-normal credit losses and possible downgrades of corporate bonds in the investment portfolio. We expect AEL to maintain financial leverage below 30% and adjusted fixed-charge coverage between 6x and 8x.
We may lower our ratings in the next 12-24 months if AEL's overall competitive position deteriorates due to a weaker market position, or if capital adequacy drops significantly below the 'A' confidence level for a sustained period. Likewise, unsuccessful attempts by management to improve capitalization could have second-order competitive repercussions.
We could affirm the current ratings and revise our outlook to stable from negative in the next 12-24 months if AEL can sustainably improve its capital adequacy at the strong level and/or experience better-than-expected performance of vulnerable corporate assets, relative to our base case.
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