CHICAGO--(BUSINESS WIRE)--Fitch Ratings has maintained the Rating Watch Negative for the 'BBB+' Insurer Financial Strength (IFS) rating of Athene Annuity & Life Assurance Company (Athene) following the completion of the acquisition of Aviva USA Corporation and its subsidiaries, Aviva Life and Annuity Company and Aviva Life and Annuity Company of New York (collectively Aviva USA).
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 Aviva USA business from Aviva PLC for $1.55 billion plus purchase price adjustments.
During the fourth quarter of 2013, 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 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 assets to approximately $60 billion and thus provide greater economies of scale. The combined entities will become one of the largest issuers of fixed 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;
--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.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Insurance Rating
Methodology' (Aug. 19, 2013).
Applicable Criteria and Related Research:
Insurance Rating
Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715468
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=804075
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