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Fitch Maintains Rating Watch Negative on Athene's IFS Rating
May 2, 2013 / 9:12 PM / 5 years ago

Fitch Maintains Rating Watch Negative on Athene's IFS Rating

(The following statement was released by the rating agency) CHICAGO, May 02 (Fitch) Fitch Ratings has maintained the Rating Watch Negative for the 'BBB+' insurer financial strength (IFS) rating of Athene Annuity & Life Assurance Company (Athene) on. 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 Group. 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 Corporation. 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. RATING SENSITIVITIES 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 initial expectations; --Reasonable integration plan; --Leverage, capitalization and financial metrics commensurate with the current rating level. 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. 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: Additional information is available at ''. Related Research: --'Insurance Rating Methodology' (Jan. 11, 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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