Fitch Affirms Athene's 'A-' IFS Rating; Outlook Stable
KEY RATING DRIVERS
The affirmation 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 earn a net investment spread of 1%-2% on the difference between an expected investment return on assets and its cost of funds. This translates into a long-term GAAP return on equity (ROE) target of 15% or higher. In aggregate, AHL has thus far generally 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 among the top-five largest issuers of fixed-indexed annuities in the U.S. Given AHL'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. AHL targets an RBC ratio near 400% across the organization. At June 30, 2015, Athene's RBC ratio for the U.S. domiciled subsidiaries was 529%. Athene uses affiliated reinsurance and currently cedes 80% of its annuity business and 100% of its funding agreement business to Athene Life Re. At June 30, 2015, Athene Life Re had Bermuda statutory capital of $5.4 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. Historically AHL was underweight in corporate bonds but as part of the redeployment of the Aviva USA investment portfolio the company has increased its exposure to this asset class. Fitch will continue to monitor 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. The recent hires of two insurance industry veterans to fill senior management roles have reduced key man risk.
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 AHL's operating performance, resulting in 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.
FULL LIST OF RATING ACTIONS
Fitch has affirmed the following ratings with a Stable Outlook:
Athene Holding Ltd.
--Long-term IDR at 'BBB'.
Athene Annuity & Life Assurance Company
Athene Annuity and Life Company
Athene Annuity & Life Assurance Company of New York
Athene Life Re Ltd.
--IFS at 'A-'.
Athene Global Funding
--$250 million series 2015-1 2.875% fixed rate notes due Oct. 23, 2018 at 'A-'.
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