A.M. Best Downgrades Issuer Credit Ratings of Aviva Life and Annuity Company and Its Subsidiary
A.M. Best Co. has downgraded the issuer credit ratings (ICR) to “a” from “a+” and affirmed the financial strength rating (FSR) of A (Excellent) of Aviva Life and Annuity Company (ALAC) (West Des Moines, IA) and its wholly owned subsidiary, Aviva Life and Annuity Company of New York (ALACNY) (Melville, NY) (together, referred to as Aviva USA). All ratings have been removed from under review with negative implications and assigned a stable outlook.
Both ALAC and ALACNY are the principal insurance subsidiaries of Aviva USA Corporation, which is an indirect, wholly owned subsidiary of Aviva plc (Aviva). Aviva is a global diversified financial services company based in the United Kingdom.
In June 2012, A.M. Best maintained the under review status for Aviva USA's ratings due to its parent's strategic evaluation of its subsidiary businesses and changes to its parent's senior management, especially the departure of the parent's chief executive officer. Aviva, the U.K.'s second-biggest insurer by market value, is evaluating, selling or winding down a number of businesses as it seeks to exit less profitable markets and manage capital. Additionally, European Solvency II regulations—which are yet to be finalized—will require some insurers to hold more capital against their U.S. units, thus reducing returns and making it more difficult to market products on a competitive basis.
Historically, A.M. Best has viewed Aviva USA as strategically important to the Aviva organization as well as an important growth opportunity. Additionally, to fund this growth, Aviva provided significant capital contributions to Aviva USA. Thus, the ratings of Aviva USA historically reflected this explicit support and strength of Aviva. However, due to recent events—including the write-off of the goodwill associated with Aviva's U.S. operations—A.M. Best has downgraded Aviva USA's ICRs by one notch to reflect more of the stand-alone credit profile of the U.S. operating companies.
The ratings for Aviva USA continue to recognize its leading market position in indexed life insurance and fixed-indexed annuities, innovative product development and multiple distribution networks and its favorable risk-adjusted capitalization. Aviva USA markets a wide array of life and fixed annuity products through multiple distribution channels, which includes brokerage general agents, career agents, personal producing general agents and independent marketing organizations. Aviva USA has demonstrated a well diversified investment portfolio and sound risk management practices. To manage statutory capital, Aviva USA established a number of Vermont-domiciled reinsurance captives to provide funding for Regulation AXXX and XXX reserve requirements and one that provides financing for the embedded value of a regulatory closed block. Aviva USA's strategy over the last three years has been to focus on greater capital efficiency by moderating the pace of growth in its fixed-indexed annuities. This strategy is in line with the organization's initiatives to alter its business mix and grow its life insurance business.
Aviva USA results are generally positive; however, in some periods when a reserve financing transaction occurs (e.g., December 2011), there is a surplus strain impacting statutory net income, with a corresponding offset in surplus. In periods when a reserve financing transaction is not in place, the redundant reserve strain negatively impacts results. Moreover, Aviva USA's focus on indexed life insurance and annuities subjects its earnings to some equity market risk. Aviva USA's financial results for 2010 and 2011 improved from prior years, due to management's actions to improve margins and reduce new business strain, as well as a more favorable impairment experience.
A.M. Best believes ALAC and ALACNY are well positioned at their current rating levels. Negative rating actions could occur if Aviva USA's capitalization, operating performance or both fall markedly short of A.M. Best's expectations. Negative rating pressure could occur if the company's business profile should materially contract due to a change in its strategy or loss of distribution.
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. Best's Credit Rating Methodology can be found at www.ambest.com/ratings/methodology.
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