-- Aviva PLC announced an agreement to sell Aviva USA Corp., which
contains its U.S. insurance subsidiaries (Aviva Life and Annuity Co. and Aviva
Life and Annuity Co. of New York, collectively referred to as Aviva USA) to
Athene Holding Ltd, for $1.55 billion.
-- We affirmed our ratings on Aviva USA. The ratings remain on
CreditWatch Developing, where they were placed on Nov. 12, 2012. The
continuation of the CreditWatch Developing status reflects the level of
uncertainty regarding how Aviva USA's credit profile could change as it is
sold and transitioned to its new owner.
-- If there are no material developments, we would not expect to make any
credit comments on Aviva USA until after the transaction closes, which is
expected to take place by mid-year 2013.
On Dec. 26, 2012, Standard & Poor's Ratings Services affirmed its 'A-' ratings
on Aviva PLC's U.S. insurance subsidiaries (Aviva Life and Annuity Co. and
Aviva Life & Annuity Co. of New York; collectively referred to as Aviva USA).
All of the ratings remain on CreditWatch Developing, where they were placed on
Nov. 12, 2012.
Our ratings and outlooks on Aviva PLC and its other rated subsidiaries remain
unchanged following this announcement.
On Dec. 21, 2012, Aviva PLC announced its plan to sell Aviva USA to Athene
Holding Ltd. (Athene; not rated) for $1.55 billion. The continuation of the
CreditWatch Developing placement reflects the level of uncertainty regarding
how Aviva USA's credit profile could change as it is sold and transitioned to
its new owner. Subject to regulatory approval, this transaction is expected to
close by mid-year 2013. Aviva will retain the North American asset management
activities of Aviva Investors that are focused on third parties, as well as
Aviva PLC assets outside of the U.S.
Athene is a life insurance holding company focused principally on the
retirement market. Its business, through its subsidiaries, is focused
primarily on issuing and reinsuring fixed annuities, including fixed indexed
The counterparty credit and insurer financial strength ratings on Aviva USA
are based on their stand-alone credit fundamentals. The ratings reflect our
view of Aviva USA's strong competitive position in the U.S., supported by its
effective multichannel distribution network, focused and leading product suite
in the indexed products market, strong prospective core operating performance,
and capitalization. During the past year, Aviva USA's management team has made
progress in maintaining or improving the strength of its business franchise,
its enterprise risk management infrastructure, and its key financial metrics.
In our opinion, these positive factors are offset by the earnings
concentrations in two product lines (indexed annuity and indexed life), spread
compression that reflects the low interest rate environment, capital strain
created by AXXX/XXX reserve requirements, and the relatively high proportion
of life insurance products sold with no-lapse guarantees, which a prolonged
low interest rate environment could adversely affect.
Aviva USA has a strong competitive position in the equity indexed annuity
(EIA)and equity indexed life market, with about 80% of its liabilities related
to accumulation products and 20% to life insurance products. New sales have
remained concentrated in two product lines. Indexed annuity products accounts
for about 95% of the accumulation product segment sales, and indexed life
products account for about 90% of the protection product segment sales. From
our assessment, we believe that the firm's EIA risks are well managed. Given
that Aviva USA relies on AXXX/XXX solutions for its life business, its product
design and new product pricing remains exposed to market risk.
In July 2012, we revised our strategic view of the U.S. operations to
"nonstrategically important" to Aviva PLC, from "strategically important" and
lowered the ratings by one notch based on our assessment that these operations
could be disposed of given Aviva PLC's revised strategic plans. In November
2012, we removed the one notch of implied parental support to our published
ratings on Aviva USA when Aviva PLC announced that the U.S. operations were
being tendered for sale.
The CreditWatch Developing status reflects the uncertainty we have regarding
the new owner's plans for Aviva USA and what this organization may look like
in the future. We will monitor developments and will meet with Athene's
management to understand its business strategy for Aviva USA. We expect to
resolve the CreditWatch placement within a month following the transaction
Standard & Poor's could lower the ratings if Aviva USA's earnings or capital
adequacy deteriorate, if its risk profile increases, or if material changes
are made to the underlying business franchise.
For Aviva USA to maintain the current stand-alone ratings, we would expect the
company to maintain its very strong franchise position in equity indexed
products in the U.S. with sales that remain in line with industry trends, net
interest margins that are maintained or improve, and International Financial
Reporting Standards pretax operating earnings remaining at or better than
levels seen in 2011 and 2012. Operating results will remain sensitive to the
relative level of long term interest rates and net interest margins given the
high proportion of fixed-rate products sold. We expect capitalization to
remain redundant at the 'A' confidence level, based on our model, that
liquidity will remain strong, and that losses within the investment portfolio
will remain manageable.
While deemed to be much less likely, we could raise the ratings if the new
owners provide suitable explicit support or credit enhancements for Aviva USA,
or if Aviva USA's earnings increase sustainably and on a risk adjusted basis,
asset quality is maintained or improves, or capital adequacy is supportive of
Related Criteria And Research
-- Principles Of Credit Ratings, Feb. 16, 2011
-- Use Of CreditWatch And Outlooks, Sept. 14, 2009
-- Interactive Ratings Methodology, April 22, 2009
-- Counterparty Credit Ratings And The Credit Framework, April 14, 2004
Ratings Affirmed, Remian On CreditWatch
Aviva Life and Annuity Co.
Aviva Life and Annuity Co. of NY
Counterparty credit rating A-/WatchDev/-
Financial strength rating A-/WatchDev/-