Fitch Affirms Athene's IFS Rating; Removes Rating Watch Negative

Fri Dec 20, 2013 12:55pm EST

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(The following statement was released by the rating agency) CHICAGO, December 20 (Fitch) 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 risk-adjusted spread. RATING SENSITIVITIES 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. Contact: Primary Analyst Tana M. Higman Director +1-312-368-3122 Fitch Ratings Inc., 70 W. Madison, Chicago, IL 60602 Secondary Analyst Bradley S. Ellis, CFA Director +1-312-368-2089 Committee Chairperson Brian C. Schneider, CPA Senior Director +1-312-606-2321 Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549, Email: brian.bertsch@fitchratings.com. 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 here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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