Fitch Affirms Athene's IFS Rating at 'BBB+'; Outlook Stable
CHICAGO -- July 14, 2014
Fitch Ratings has affirmed the Insurer Financial Strength (IFS) rating of
Athene Annuity & Life Assurance Company (Athene) at 'BBB+'. The Rating Outlook
KEY RATING DRIVERS
Fitch's rationale for the ratings reflects the company's strong earnings,
solid risk-adjusted capitalization, minimal financial leverage, and market
leadership position in the fixed-index annuity market. Offsetting these
positives are the company's very rapid growth, relatively short operating
history and somewhat aggressive investment portfolio.
Athene's operating earnings have been strong since inception. Fitch believes
the favorable economics of recent acquisitions have allowed the company to
earn returns in excess of traditional life insurance companies. Over the long
term Athene expects to lock in a long-term interest spread of approximately
250 basis points on the difference between an expected investment return on
assets of 6%?7% and the cost of funds on its annuity liabilities of 3%?4%.
This translates into a long-term GAAP return on equity target of 15%?20%. In
aggregate, Athene has thus far met these expectations.
Fitch views Athene's risk-based capitalization (RBC) as solid for the rating
category. Athene targets an RBC ratio of 400% or greater across its U.S.
insurance operations. Favorably, the company has very modest financial
leverage and currently has no plans to introduce additional financial leverage
in the near- to intermediate-term.
As a result of the October 2013 acquisition of the U.S. annuity operations of
Aviva PLC (Aviva USA), Athene is now one of the largest issuer of
fixed-indexed annuities in the U.S. Given Athene's focus on fixed annuities,
the company's earnings do not benefit from offsetting lines that are not as
exposed to spread compression or the effects of embedded derivatives. This
could result in greater earnings volatility relative to other more diversified
Athene Holding Limited (AHL), a Bermuda-domiciled privately held insurance
holding company, was formed in 2008. While the company's operating history is
short, Fitch notes that Athene is led by a team with extensive industry
experience in managing net investment spread businesses within life insurance
companies. Since 2011 the company has grown rapidly through a series of
acquisitions with the largest being the Aviva USA transaction. Integration of
Aviva USA remains on track and full integration is expected to be completed by
the end of 2014.
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 risk-adjusted spread.
The key rating triggers that could result in a rating upgrade include:
--Continued successful execution of Aviva USA integration plans;
--Additional seasoning of the company's acquired in-force book of business
over the next 6-12 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 integration 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 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
below-investment grade 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
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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
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