Fitch Maintains Rating Watch Negative on Athene's IFS Rating
CHICAGO -- May 2, 2013
Fitch Ratings has maintained the Rating Watch Negative for the 'BBB+' insurer
financial strength (IFS) rating of Athene Annuity & Life Assurance Company
KEY RATING DRIVERS
Fitch placed Athene on Rating Watch Negative on Dec. 21, 2012 following the
company's announcement that Athene Holding Ltd. (AHL) would be acquiring the
U.S. annuity and life operations (Aviva USA) of Aviva PLC for $1.55 billion.
Following close, Aviva USA's insurance operations will become wholly owned
subsidiaries of Athene.
Since then, Fitch has had further discussions with Athene management regarding
its integration and operational plans for Aviva USA. Importantly, Athene
announced that it has entered into an agreement to sell, through a reinsurance
arrangement, Aviva USA's life insurance business to Commonwealth Annuity and
Life Insurance Co., a wholly owned subsidiary of Global Atlantic Financial
The acquisition of Aviva USA and simultaneous sale of the life business is
expected to close by the end of third quarter-2013. Fitch will continue to
review the progress of the transaction during the closing period. Assuming no
material changes to the transaction, Fitch may not take any additional rating
action prior to closing.
Following close, Fitch expects to complete a comprehensive review of the Aviva
USA business. Fitch will conduct further discussions with company actuaries.
Fitch will also conduct a review of the results of Aviva USA's cash flow
testing and stress testing results under various scenarios, particularly given
the interest sensitive nature of the business. Fitch is also concerned with
the persistency and profitability of the existing block of business AHL will
acquire, which may have been negatively impacted by the timeframe from deal
announcement until close.
Fitch views this transaction as a transformational event for Athene due to the
large block of the existing business and the significant new business
infrastructure Athene will acquire. The transaction is expected to increase
Athene's aggregate liabilities to almost $60 billion and thus provide greater
economies of scale. The combined entities will become the second largest
issuer of fixed indexed annuities in the U.S.
Fitch believes Athene faces execution and integration risk, particularly since
this is the company's largest deal to date. Favorably, AHL has established a
successful track record over the past two years with the purchase and
integration of Athene, Investors Insurance Corporation and Presidential Life
Fitch is also concerned by the significant increase in AUM resulting from the
acquisition. To date, AHL has been able to remain nimble and capitalize on
opportunities and dislocations in the marketplace. Fitch will continue to
monitor the redeployment of Aviva USA's investment portfolio and the company's
ability to continue to capture an adequate risk-adjusted spread.
Fitch views Athene's investment portfolio as somewhat aggressive relative to
traditional life insurance companies. Athene has an above-average exposure to
structured securities, in particular non-agency RMBS that the company acquired
beginning in 2011 at a steep discount. In 2012 AHL also increased its exposure
to higher-yielding mezzanine mortgage loans and limited partnerships.
The acquisition of Aviva USA will result in an increase in operating and asset
leverage. However, run-rate leverage metrics are expected to remain supportive
of the current rating category. Additionally, AHL's financial leverage remains
below that of its peers.
The key rating triggers that could result in a Rating Watch removal and
subsequent ratings affirmation:
--Completion of the review of the Aviva USA annuity business with no
unforeseen issues that could lead to results significantly below Athene's
--Reasonable integration plan;
--Leverage, capitalization and financial metrics commensurate with the current
The key rating triggers that could result in a ratings downgrade include:
--Any unexpected issues arising from the acquisition of Aviva USA and sale of
the life business;
--The announcement of any other acquisitions this year that reduce management
focus on the Aviva USA integration;
--Deterioration in operating performance, resulting in Athene's run-rate
operating losses for four consecutive quarters;
--A decline in Athene's RBC ratio below 350% or a decline in 7% capital to
reserves at AHL;
--Significant changes in asset allocation, which may include an increase in
limited partnership exposure to over 15% or a large increase in BIG exposure.
Additional information is available at 'www.fitchratings.com'.
--'Insurance Rating Methodology' (Jan. 11, 2013).
Applicable Criteria and Related Research
Insurance Rating Methodology - Amended
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Tana M. Higman, +1-312-368-3122
Fitch Ratings Inc., 70 W. Madison, Chicago, IL 60602
Bradley S. Ellis, CFA, +1-312-368-2089
Brian C. Schneider, CPA, +1-312-606-2321
Brian Bertsch, New York, +1 212-908-0549
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