Fitch Upgrades Athene’s IFS Rating to ‘A-‘; Outlook Stable
May 11, 2015 by Business Wire
CHICAGO, May 11, 2015 (BUSINESS WIRE) — Fitch Ratings has upgraded the Insurer Financial Strength (IFS) rating of Athene Annuity & Life Assurance Company (Athene) to ‘A-‘ from ‘BBB+’. The Rating Outlook is Stable. Athene is an indirect subsidiary of Athene Holding Ltd. (AHL), a privately held Bermuda-domiciled insurance holding company. AHL’s other major subsidiaries are Athene Life Re Ltd. (Athene Life Re), a Bermuda-domiciled reinsurer, Athene Annuity and Life Company, a Iowa-domiciled insurer, and Athene Annuity & Life Assurance Company of New York, a New York-domiciled insurer.
KEY RATING DRIVERS
The upgrade reflects AHL’s strong earnings, improved capitalization following a $1.3 billion equity capital raise, lack of financial leverage and market leadership position in the fixed-indexed annuity market. Offsetting these positives are the company’s very rapid acquisition-driven growth, relatively short operating history and somewhat aggressive investment portfolio.
AHL’s operating earnings have been strong since inception. Fitch believes the favorable economics of recent acquisitions and favorable market conditions have allowed the company to earn returns in excess of traditional life insurance companies. Over the long term, AHL expects to lock in an interest spread of approximately 250 basis points (bps) on the difference between an expected investment return on assets of 5.5% and the cost of funds on its annuity liabilities of 3%. This translates into a long-term GAAP return on equity target of 15%-20%. In aggregate, AHL has thus far met these expectations.
As a result of the October 2013 acquisition of the U.S. annuity and life operations of Aviva PLC (Aviva USA), AHL is now the fifth largest issuer of fixed-indexed annuities in the U.S. Given Athene’s focus on fixed annuities, the company lacks the diversification benefits of companies who offer a broader array of products. This could result in greater earnings volatility relative to other more diversified industry participants. Additionally, given AHL’s relatively short operating history, the company’s results are untested in a down equity market or rapidly rising interest rate environment.
Fitch views AHL’s risk-based capitalization (RBC) as solid for the rating category. Following the recent $1.3 billion equity capital raise, capitalization has further improved. AHL targets an RBC ratio near 400% across the organization. At year-end 2014, Athene’s RBC ratio for the U.S. domiciled subsidiaries was 506%. Athene uses affiliated reinsurance and currently cedes 80% of its annuity business and 100% of its funding agreement business to Athene Life Re. At year-end 2014, Athene Life Re had Bermuda statutory capital of $4.1 billion, well in excess of statutory requirements.
Favorably, AHL has no financial leverage and currently has no plans to introduce additional financial leverage in the near to intermediate term.
Fitch views AHL’s investment portfolio as somewhat aggressive relative to traditional life insurance companies. AHL has an above-average exposure to structured securities, including non-agency RMBS that the company acquired beginning in 2009 at a steep discount. Since 2012, 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, which is expected to be completed in 2015, and the company’s ability to continue to capture an adequate risk-adjusted spread.
AHL was formed in 2008. While the company’s operating history is short, Fitch notes that AHL 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 very rapidly through a series of acquisitions with the largest being the Aviva USA transaction. Subsequent to the Aviva USA acquisition, AHL identified a material weakness in controls over financial reporting of actuarial reserves and tax balances. Fitch believes these material weaknesses will be completely remedied by early 2016 and does not expect material restatements of financial results.
RATING SENSITIVITIES
While Fitch does not expect an upgrade in the near to intermediate term, key rating triggers that could result in a rating upgrade longer term include:
–Additional seasoning of the company’s acquired in-force book of business 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 11x or less.
The key rating triggers that could result in a ratings downgrade include:
–Large acquisitions that are either outside of AHL’s historical risk preference and expertise or add significantly to the company’s operating or financial leverage;
–Deterioration in operating performance, resulting in AHL’s run-rate operating losses for four consecutive quarters;
–An increase in operating leverage on a consolidated GAAP basis to over 20x;
–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’ (Sept. 4, 2014).
Applicable Criteria and Related Research:
Insurance Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=756650
Additional Disclosure
Solicitation Status
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SOURCE: Fitch Ratings
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