Rating cuts prompted by life company’s sale to Athene Holding for £1.1bn

Down arrow

Rating agency Moody’s has downgraded the insurance financial strength of Aviva Life and Annuity Company to Baa2 from Baa1.

It has also cut the long-term issuer rating of intermediate parent Aviva USA Corporation to Ba2 from Ba1.

The downgrades follow ultimate parent company Aviva’s decision to sell the Aviva USA to Bermuda-based life company Athene Holding for $1.8bn (£1.1bn).

The outlook on the ratings is negative, meaning there is a risk of further downgrades.

Moody’s said the downgrades were driven by its expectation that the business and financial profile of the company will weaken under Athene’s ownership, compared to the company’s current credit profile as a subsidiary of Aviva.

Given Athene’s “very rapid” growth in the fixed annuity business over the past three years through acquisitions and reinsurance transactions, Moody’s believes Aviva Life’s business will become more concentrated in fixed annuities with less emphasis on life insurance products, prompting less product diversification at the company.

Of particular concern is the rapid growth of fixed annuities in the current low interest rate environment, Moody’s said.

Moody’s senior credit officer Neil Strauss said: “Maintaining product sales through Aviva Life’s non-proprietary distribution channels, as well as maintaining policy persistency, will be challenging with the ownership change, especially given the long period of time between the deal announcement and the anticipated closing during 2013.”

Moody’s anticipates potentially diminished financial flexibility for the company as part of Athene compared to being part of Aviva. The rating agency also expects that Aviva Life’s capitalisation and investment portfolio will be managed more aggressively under Athene’s ownership than it was under Aviva’s.

On the positive side, however, Moody’s said the transaction could improve profitability at Aviva Life given likely synergies and cost cutting, the likelihood that Athene will redesign and reprice the annuity products, and benefits associated with Athene’s Bermuda-based reinsurer.