On Dec. 1, 2004, Standard & Poor's Ratings Services assigned its 'BB+' senior debt rating to American Equity Investment Life Holding Co.'s (AEL) proposed $175 million senior, unsecured convertible debt issue, which is due in 2024. (There is an option to issue an additional $75 million.)

The proceeds of the issuance will support AEL's insurance operating company growth.

The rating reflects the company's better risk management, the senior team's enhanced capabilities, AEL's well-managed growth without damaging the relationship with its distribution force, improving earnings and interest coverage, improved capital at the operating companies, and strong liquidity.

Despite all these positive factors, Standard & Poor's is concerned about the quality of capital and earnings at both the operating companies and the holding company because of the increasing financial leverage as well as the continued, but improved, aggressive asset/liability management and product concentration. The asset/liability management risk could cause volatility of the GAAP equity and deferred acquisition cost assets in a rising interest rate environment. As a result, the company's economic long-term profitability could be affected if interest rates rise rapidly in the near term or if the yield curve flattens.

Outlook

In 2004 and 2005, AEL is expected to continue to generate sustainable, controlled asset growth from its distribution channels while improving its profitability through improving gross spreads and maintaining expense discipline. Operating pretax GAAP income (excluding realized capital gains/losses and FAS 133 adjustments) is expected to be more than $70 million in 2004 and to grow at a double-digit rate in 2005. Capitalization is expected to remain stable in the next two years, with a Standard & Poor's risk-adjusted capital ratio of more than 140%. Double leverage is expected to be maintained at an appropriate level (less than 145%). Standard & Poor's expects the company to improve its exposure to interest rate risk in the short term by reducing the negative convexity in its asset portfolio. In addition, Standard & Poor's expects financial leverage (debt plus preferred to capital) to remain at less than 60% and fixed-charge coverage to remain at more than 3x.