A.M. Best Affirms American Equity's A- (Excellent) Financial Strength Rating; Revises Outlook to Negative, Consistent with Life Industry Outlook.
* More than adequate level of risk-adjusted capitalization
* Consistently positive GAAP operating results
* Leading position in the fixed-index annuity segment
* Favorable surrender charge protection in its annuity business
* Good asset liability management program including the hedging of risks associated with its fixed-indexed annuity business
* Overall business scale that was achieved over the past ten years
The revision of the ratings outlook is consistent with A.M. Best's negative outlook on the life insurance industry as a whole. As to AEL, A.M. Best noted that while the company's investments in commercial loans have performed as expected to date, in A.M. Best's view, such loans are exposed to heightened financial risks as a result of macroeconomic challenges. In addition, A.M. Best expressed concern over possible volatility in investment earnings and spreads. In response to these questions, AEL is providing the following additional information regarding its commercial mortgage loans and spread management in the current environment.
As of September 30, 2008, AEL had $2.3 billion of commercial mortgage loans representing 17.4% of invested assets. This group of mortgage loans is made up of over 950 individual loans with an average size of $2.4 million per loan. At present all of AEL's commercial mortgage loans are fully performing in accordance with their terms and no facts exist indicating that losses or impairments of value will be recognized in the near term. In addition, these loans have the following characteristics as of September 30, 2008:
* Weighted average book yield of 6.38%
* Weighted average loan-to-value ratio of 59.7% based on appraised values
* For loans closed in 2008, weighted average loan-to-value ratio of 56.9% based on appraised values
* Weighted average debt service coverage ratio of 1.55 times
* Personal recourse in 55% of loans
* 25% cash borrower equity required in substantially all cases
* No interest-only payment schedules, target fully amortizing loans
* No defaults, no payment delinquencies longer than 30 days, and no restructuring of loans
* Well-diversified by property type and geographic region
AEL continues to view its commercial loans as high quality assets with duration and cash flow characteristics that are well matched to AEL's annuity liabilities.
Gross investment spread (yield on invested assets minus cost of money on annuity liabilities) has been improving throughout 2008 as a result of both an increase in the average yield on invested assets as well as a reduction in the cost of money for annuity liabilities. Spread results for the quarter and nine months ending September 30, 2008 compared to the same periods in 2007 are as follows:
While equity market volatility has risen dramatically in October 2008, AEL's average cost of money on its index annuities was 3.29% for the first three weeks of October, reflecting the facts that: (i) there has been no cost increase in a significant category of option purchases; and (ii) policyholders are electing to allocate a larger percentage of their index annuity fund values to the fixed interest crediting strategy within the products, with the fixed interest rate at 3.25%.
Additional detail on results of operations for the third quarter of 2008 will be discussed in the company's earnings call scheduled to occur on November 6, 2008.
CAUTION REGARDING FORWARD-LOOKING STATEMENTS
This press release contains forward-looking statements within the meaning of The Private Securities Litigation Reform Act of 1995. Forward-looking statements relate to future operations, strategies, financial results or other developments, and are subject to assumptions, risks and uncertainties. Statements such as "guidance," "expect," "anticipate," "believe," "goal," "objective," "target," "may," "should," "estimate," "projects," or similar words as well as specific projections of future results qualify as forward-looking statements. Factors that may cause our actual results to differ materially from those contemplated by these forward looking statements can be found in the Company's Form 10-K filed with the Securities and Exchange Commission. Forward-looking statements speak only as of the date the statement was made and the Company undertakes no obligation to update such forward-looking statements. There can be no assurance that other factors not currently anticipated by the Company will not materially and adversely affect our results of operations. Investors are cautioned not to place undue reliance on any forward-looking statements made by us or on our behalf.
ABOUT AMERICAN EQUITY
American Equity Investment Life Holding Company, through its wholly-owned operating subsidiaries, is a full-service underwriter of a broad line of annuity and insurance products with a primary emphasis on the sale of index and fixed-rate annuities. The company's headquarters are located at 5000 Westown Parkway, West Des Moines, Iowa, 50266. The mailing address of the company is: P.O. Box 71216, Des Moines, Iowa, 50325. For more information, visit our website www.american-equity.com