A.M. Best Affirms Ratings of American Equity Investment Life Insurance Companies

Business Wire, Oct 30, 2007

OLDWICK, N.J. -- A.M. Best Co. has affirmed the financial strength rating (FSR) of A- (Excellent) and the issuer credit ratings (ICR) of "a-" of American Equity Investment Life Insurance Company (American Equity) (Des Moines, IA) and its wholly owned subsidiary, American Equity Investment Life Insurance Company of New York. Concurrently, A.M. Best has affirmed the ICR of "bbb-" of American Equity Investment Life Holding Company (AEL) (Des Moines, IA) [NYSE: AEL], the parent of American Equity. A.M. Best also has affirmed the existing debt and indicative ratings of AEL. The outlook for all ratings is stable. (See below for a detailed list of the companies and ratings.)

The ratings recognize American Equity's increased risk-adjusted capitalization, positive statutory and GAAP earnings, overall limited asset/liability mismatch and good product risk management practices. The company maintains a leading market position as a top five provider of fixed indexed annuities (FIA). As such, American Equity's liability profile -- with reserves of roughly 80% FIA and 20% fixed rate annuities -- has solid surrender charge protection. Statutory and GAAP operating results have benefited from favorable interest spreads and scale in the group's annuity block with favorable persistency helped by a long-term surrender charge structure. Additionally, American Equity's product risk management practices are effective, evidenced by careful monitoring of hedging-related option purchases, ongoing refinement of hedging costs and prudent monitoring of option price volatility. Consolidated financial leverage and interest coverage are within expectations for the current ratings. Going forward, A.M. Best expects interest coverage to be more than three times and adjusted financial leverage to remain within the mid 30% range.

These rating strengths are tempered by AEL's limited business profile (i.e., a monoline annuity writer), above-average interest rate risk and a high and increasing DAC-to-equity ratio. A.M. Best notes ongoing regulatory risk and potential product suitability issues faced by FIA writers, as well as an increasingly competitive landscape that may impact profit margins over time. In addition, A.M. Best notes that American Equity's interest rate risk remains high, given a substantial percentage of investments held in callable U.S. Government and agency bonds, two-third's of which are carried at book value on the balance sheet. However, American Equity's current cash flow modeling does not suggest the need to liquidate these investments over the near term, thus precluding economic realization of interest rate-related losses.

The following debt rating has been affirmed:

American Equity Investment Life Holding Company --

-- "bbb-" on $260 million 5.25% senior unsecured convertible notes, due 2024

The following indicative ratings have been affirmed:

American Equity Investment Life Holding Company --

-- "bbb-" on senior unsecured debt

-- "bb " on subordinated debt

-- "bb" on preferred stock

American Equity Capital Trust V and VI --

-- "bb" on trust preferred securities

Founded in 1899, A.M. Best Company is a global full-service credit rating organization dedicated to serving the financial and health care service industries, including insurance companies, banks, hospitals and health care system providers. For more information, visit www.ambest.com.