A.M. Best Removes From Under Review Ratings of AVIVA plc and Its Subsidiaries
A.M. Best Europe – Rating Services Limited has removed from under review with negative implications and affirmed the financial strength rating (FSR) of A (Excellent) and issuer credit ratings (ICR) of “a+” of the insurance subsidiaries of AVIVA plc (AVIVA) (United Kingdom). Additionally, A.M. Best has removed from under review with negative implications and affirmed the ICR of “a-” and all debt securities of AVIVA. The outlook assigned to all FSRs is stable, while the outlook assigned to the ICRs is negative. (Please see below for a detailed listing of the companies and ratings.)
A.M. Best also has removed the ICR rating uplift from AVIVA, which was afforded to the life insurance subsidiaries of Aviva USA Corporation (Aviva USA), a life operation based in the United States. (Please see press release dated 31 October 2012 titled, “A.M. Best Downgrades Issuer Credit Ratings of Aviva Life and Annuity Company and Its Subsidiary”.)
In June 2012, A.M. Best maintained the under review status for AVIVA's ratings due to its strategic evaluation of AVIVA's businesses and changes to its senior management, especially the departure of the chief executive officer.
The main drivers of the rating affirmations are AVIVA's improving risk-adjusted capitalisation as at June 2012 and significant measures it has put in place to improve financial performance and ultimately its capital position in the medium term by narrowing its business profile. A.M. Best expects that both the stability of senior management and its strategic plans will be prioritised by any new chief executive officer appointed in the coming months.
The assigned negative outlook on the ICRs is due to A.M. Best's belief that the execution risks associated with AVIVA's plan to exit or restructure some business segments are high in the current economic environment. Additionally, the organisation is likely to experience some temporary pressure in earnings, and the full results of the plan are not expected to be seen before the end of 2014. A.M. Best notes that AVIVA's extension of its debt deleveraging timetable also has a bearing on the assigned ICRs' negative outlook.
Together with the strategic plan to restructure or exit some segments, AVIVA is conducting a delayering programme of its organisation, which will result in a significant simplification of its internal structure. Both projects and other cost-saving measures are expected to achieve a cost reduction of GBP 400 million in the period 2012-2014.
In A.M. Best's opinion, AVIVA's risk-adjusted capitalisation improved between year-end 2011 and half-year 2012, and remains supportive of the current ratings, although the company is considerably exposed to volatility in the financial markets. The recent reduction in the level of goodwill and intangibles had a positive impact on the quality of AVIVA's risk-adjusted capitalisation in spite of the reduction in its retained earnings through the write-off of GBP 876 million. Other positive contributions came from the rebound of both the fund for future appropriations (backing the with-profits business) and the value of the company's in force business (a measure of embedded value) that A.M. Best gives credit for in its Best's Capital Adequacy Ratio (BCAR). Going forward, A.M. Best expects AVIVA's risk-adjusted capital position to remain strong but sensitive to sharp movements in the financial markets.
AVIVA's business portfolio continues to be exposed to financially troubled economies such as Spain, Italy and Ireland, where consumer demand for life products has been sharply curtailed. Another large market for AVIVA is France, which saw a drop in its premium income in the first half of 2012. As such, life gross premium income declined by 15% in the year to June 2012, whilst non-life business remained stable. For both year-end 2012 and 2013, A.M. Best expects a further reduction in premiums led by both depressed consumer demand in some geographies and the potential disposal of some businesses around the globe.
Despite AVIVA's attempts to remove sources of volatility from its financial performance (i.e., the sell-down of Delta Lloyd N.V., a Dutch insurer) the organisation's earnings at half-year 2012 were nevertheless negatively affected by the write-off of goodwill and intangibles from its US operations in spite of positive investment variances during this period. Consequently, a loss before tax of GBP 477 million was registered as at June 2012, compared to a loss of GBP 59 million in the same period in 2011.
The FSR of A (Excellent) and ICRs of “a+” have been affirmed for the following subsidiaries of AVIVA plc. All ratings have been removed from under review with negative implications. The ICRs have been assigned a negative outlook, while the FSRs have been assigned a stable outlook.
- Aviva Insurance Limited
- Aviva International Insurance Limited
- Aviva Life & Pensions UK Limited
- Aviva Annuity UK Limited
- Aviva Vida y Pensiones, S.A de Seguros y Reaseguros
- Aviva Assurances
- Aviva Vie
- Aviva Epargne Retraite
The ICR of “bbb+” has been affirmed for Aviva Italia Holding S.p.A. The rating has been removed from under review with negative implications and assigned a negative outlook.
The following senior debt rating has been affirmed, removed from under review with negative implications and assigned a negative outlook:
-- “a-” on GBP 200 million 9.5% guaranteed bonds, due 2016
The following subordinated debt ratings have been affirmed, removed from under review with negative implications and assigned a negative outlook:
-- “bbb+” on EUR 50 million 10.464% callable subordinated notes, due 2019
-- “bbb+” on GBP 450 million 6.625% callable subordinated notes, due 2041
-- “bbb+” on GBP 200 million 10.6725% callable subordinated notes, due 2019
-- “bbb+” on GBP 800 million 6.125% perpetual subordinated notes
-- “bbb+” on GBP 700 million 6.125% callable fixed rate reset subordinated bonds, due 2036
-- “bbb+” on EUR 650 million 5.25% callable subordinated notes, due 2023
-- “bbb+” on EUR 500 million 5.7% perpetual notes
-- “bbb+” on GBP 400 million 6.875% callable fixed rate subordinated notes, due 2058
-- “bbb+” on EUR 500 million 6.875% callable fixed rate subordinated notes, due 2038
-- “bbb+” on GBP 200 million 6.875% callable fixed rate subordinated notes, due 2058
-- “bbb+” on USD 400 million 8.25% callable subordinated notes, due 2041
The following subordinated debt rating has been withdrawn:
-- “bbb+” on USD 300 million floating rate subordinated notes, due 2017
The following direct capital instrument issues have been affirmed, removed from under review with negative implications and assigned a negative outlook:
-- “bbb” on GBP 500 million 5.9021% direct capital instruments redeemable 2020 or thereafter
-- “bbb” on EUR 700 million 4.7291% direct capital instruments redeemable 2014 or thereafter
The following direct capital instrument rating has been assigned with a negative outlook:
--“bbb” on USD 650 million 8.25% direct capital instruments redeemable 2017 or thereafter
The following indicative ratings on shelf securities have been affirmed, removed from under review with negative implications and assigned a negative outlook:
-- “bbb+” on senior subordinated notes
-- “bbb” on junior subordinated notes
The methodology used in determining these ratings is Best's Credit Rating Methodology, which provides a comprehensive explanation of A.M. Best's rating process and contains the different rating criteria employed in the rating process. Key criteria utilised include: “Risk Management and the Rating Process for Insurance Companies”; “Understanding Universal BCAR”; “Catastrophe Analysis in A.M. Best Ratings”; “Equity Credit for Hybrid Securities”; “Rating Members of Insurance Groups”; and “Insurance Holding Company and Debt Ratings”. Best's Credit Rating Methodology can be found at www.ambest.com/ratings/methodology.
In accordance with Regulation (EC) No. 1060/2009, the following is a link to required disclosures: A.M. Best Europe - Rating Services Limited Supplementary Disclosure.
A.M. Best Europe – Rating Services Limited is a subsidiary of A.M. Best Company. Founded in 1899, A.M. Best Company is the world's oldest and most authoritative insurance rating and information source. For more information, visit www.ambest.com.
Copyright © 2012 by A.M. Best Company, Inc. ALL RIGHTS RESERVED.
A.M. Best Europe
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