Fitch Affirms Athene's IFS Rating; Removes Rating Watch Negative
CHICAGO -- December 20, 2013
Fitch Ratings has affirmed the Insurer Financial Strength (IFS) rating of
Athene Annuity & Life Assurance Company (Athene) at 'BBB+' and removed it from
Rating Watch Negative. The Rating Outlook is Stable.
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 Aviva
USA Corporation and its subsidiaries, Aviva Life and Annuity Company and Aviva
Life and Annuity Company of New York (collectively Aviva USA), from Aviva PLC
for $1.55 billion plus purchase price adjustments.
The acquisition was completed on Oct. 2, 2013, and since then Fitch has
completed a comprehensive review of the Aviva USA business. As part of the
review, Fitch has met with company management to discuss integration plans and
conducted further discussions with company actuaries to review the results of
Aviva USA's year-end 2012 asset adequacy reports.
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 has acquired. The transaction has increased Athene's
aggregate assets to almost $60 billion and thus provides greater economies of
scale. The combined entities are now one of the largest issuers of fixed
annuities in the U.S.
Favorably, earnings at Aviva USA thus far in 2013 have been strong. The review
of the asset adequacy reports revealed no unusual issues. Fitch believes the
favorable economics of the acquisition provides Athene with some cushion to
still achieve acceptable returns on the business even if a modest amount of
reserve strengthening is required. The acquisition has resulted in an increase
in operating and asset leverage. However, run-rate leverage metrics are
expected to remain supportive of the current rating category.
Fitch believes the inherent execution and integration risk associated with the
Aviva USA transaction are partially mitigated by AHL's successful track record
over the past two years with the purchase and integration of Athene, Investors
Insurance Corporation and Presidential Life Corporation. Full integration of
Aviva USA is expected to take approximately one year to complete and will
involve the move of its headquarters to Iowa as well as the rebranding of
Aviva USA entities to Athene.
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 and 2013 AHL also increased its
exposure to higher-yielding mezzanine mortgage loans and limited partnerships.
Fitch will continue to monitor the redeployment of Aviva USA's investment
portfolio and the company's ability to continue to capture an adequate
The key rating triggers that could result in a rating upgrade include:
--Successful execution of Aviva USA integration plans;
--Additional seasoning of the company's acquired in-force book of business
over the next 12-18 months and demonstrated profitability of new sales;
--Strong, consistent operating performance as measured by an operating ROE of
15% or higher;
--Maintenance of operating leverage on a consolidated GAAP basis of 17x or
less and financial leverage under 10%.
The key rating triggers that could result in a ratings downgrade include:
--Any unexpected issues arising from the acquisition of Aviva USA;
--The announcement of any other sizable acquisitions in the near term 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;
--An increase in operating leverage on a consolidated GAAP basis to over 25x;
--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'.
Applicable Criteria and Related Research:
--'Insurance Rating Methodology' (Nov. 13, 2013).
Applicable Criteria and Related Research:
Insurance Rating Methodology -- Amended
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Tana M. Higman
Fitch Ratings Inc., 70 W. Madison, Chicago, IL 60602
Bradley S. Ellis, CFA
Brian C. Schneider, CPA
Brian Bertsch, +1-212-908-0549 (New York)
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