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Fitch Affirms Athene's Ratings; Outlook Stable
May 23, 2017 / 5:21 PM / 6 months ago

Fitch Affirms Athene's Ratings; Outlook Stable

(The following statement was released by the rating agency) CHICAGO, May 23 (Fitch) Fitch Ratings has affirmed the 'A-' (Strong) Insurer Financial Strength (IFS) ratings of Athene Annuity & Life Assurance Company, Athene Annuity and Life Company, Athene Annuity & Life Assurance Company of New York, and Athene Life Re Ltd. (collectively referred to as Athene). Fitch has also affirmed the Long-Term Issuer Default Rating (IDR) of Athene Holding Ltd. at 'BBB'. The Rating Outlook is Stable. A complete list of rating actions is provided at the end of this release. KEY RATING DRIVERS The affirmation of Athene's ratings reflects the company's continued very strong financial performance and earnings, very strong capital position, lack of financial leverage, and market leadership position in the fixed annuity market. Athene has made solid progress in strengthening the company's position in retail annuity and flow reinsurance businesses, in diversification of the company's business profile, and successfully transitioned to a publicly-traded company in December 2016. The ratings also reflect the company's still relatively narrow product profile and somewhat aggressive investment portfolio. Fitch believes that clarification around the implementation of new Department of Labor rules governing the sale of fixed-indexed annuities could have a positive impact on Athene's credit profile if the final rules are less restrictive to FIA writers. Fitch views Athene's financial performance and earnings as very strong. Fitch believes the favorable economics of the acquisitions the company has completed coupled with strong asset management capabilities and favorable equity market conditions have allowed the company to earn returns in excess of traditional life insurance companies, despite historically low interest rates. Over the long term, Athene expects to earn a net investment spread of 2%-3% on the difference between its investment return on assets and its cost of crediting on its deferred annuity liabilities. The company has thus far met this expectation and reported an investment margin of 2.77% for full year 2016 and 2.85% in the first quarter 2017. Fitch views Athene's capital position as very strong. The company attained a Prism score of 'Very Strong' based on Dec. 31, 2016 data for its U.S-domiciled subsidiaries and Athene Life Re Ltd., its Bermuda-domiciled reinsurance company. Athene targets an RBC ratio of at least 400% across the organization. At Dec. 31, 2016, Athene's RBC ratio for the U.S. domiciled subsidiaries was 478%. Athene uses affiliated reinsurance and currently cedes 80% of its annuity business and 100% of its funding agreement business to Athene Life Re. At Dec. 31, 2016, Athene Life Re reported Bermuda statutory capital of $6.1 billion, well in excess of regulatory requirements. Favorably, Athene has no financial leverage and currently has no plans to introduce additional financial leverage in the near to intermediate term. As a result of the October 2013 acquisition of the U.S. annuity and life operations of Aviva PLC (Aviva USA), Athene is now among the top-five largest issuers of fixed annuities in the U.S. and was the third largest writer of fixed-indexed annuities in 2016. Although Athene has made progress in diversifying its revenue into institutional funding business, the company's business profile currently lacks the business diversification benefits of companies who offer a broader array of mortality-based or fee-based products. Fitch believes that further progress on efforts to diversify its business profile, including the successful entry into the pension risk transfer business, could have a positive impact on Athene's credit profile. Fitch views Athene's investment portfolio as somewhat aggressive relative to traditional life insurance companies. The company has an above-average exposure to structured securities, particularly non-agency RMBS that the company acquired beginning in 2009 at a steep discount. Although Fitch takes a cautious view of Athene's overweight position in structured securities, which generated significant losses for the industry over the past decade, Fitch considers the company to have a high level of expertise in managing such asset classes, and considers the relative quality of the portfolio to be strong. Fitch considers the U.S. Department of Labor's (DOL) delay and ongoing review of its new regulations, collectively referred to as the 'Conflict of Interest Rule' or 'Fiduciary Rule', to be a positive development for companies like ATH who are active in the FIA market. Fitch believes that the rules as released in their final form in April 2016 would have had a material negative impact on the sale of FIAs and would likely have led to an increase in operational costs and litigation risk for companies selling such products. Although there is significant uncertainty around the outcome of the DOL's review, Fitch believes that there is a strong likelihood that the final rule and/or related prohibited transaction exemptions (PTEs) will be revised, potentially reducing the associated adverse sales impact and litigation risk. Athene was formed in 2008 and has grown quickly primarily through acquisitions but has also developed a strong competitive retail operation complemented by its large flow reinsurance business. In December 2016, the company completed its initial public offering through which certain shareholders of the company sold approximately 31 million of the company's 189 million of outstanding voting common shares. The company received no proceeds from the IPO. While the company's operating history is relatively short, Athene is led by a team with extensive industry experience in managing net investment spread businesses within life insurance companies. Fitch believes that additions over the past couple of years at the company's senior executive level have strengthened the overall profile of the management team and reduced key person risk. RATING SENSITIVITIES Key rating sensitivities that could result in a rating upgrade include: --Further improvement in business profile driven by continued progress on diversification and clarity around implementation of new Department of Labor rules governing the sale of fixed-indexed annuities; --Maintenance of current capitalization metrics, including a Prism score of 'Very Strong'; --Maintain current level of operating performance. The key rating sensitivities that could result in a ratings downgrade include: --Large acquisitions that are either outside of ATH's historical risk preference and expertise or add significantly to the company's operating or financial leverage; --Significant changes in asset allocation, which may include an increase in limited partnership exposure to over 15% or a large increase in below investment-grade exposure --Deterioration in ATH's operating performance, resulting in an ROE below 9%; --Prism score below 'Very Strong'. 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 --Medium-term note program at 'A-'. Contact: Primary Analyst Bradley S. Ellis, CFA Director +1-312-368-2089 Fitch Ratings, Inc. 70 W. Madison Street Chicago, IL 60602 Secondary Analyst Douglas L. Meyer, CFA Managing Director +1-312-368-2061 Committee Chairperson Brian C. Schneider, CPA Senior Director +1-312-606-2321 Media Relations: Hannah James, New York, Tel: + 1 646 582 4947, Email: hannah.james@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Insurance Rating Methodology (pub. 26 Apr 2017) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here#solicitation Endorsement Policy 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 WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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