LONDON--(BUSINESS WIRE)--A.M. Best has affirmed the financial strength rating (FSR) of A (Excellent) and the issuer credit ratings (ICR) of “a+” of the insurance subsidiaries of Aviva plc (Aviva) (United Kingdom). Additionally, A.M. Best has affirmed the ICR of “a-” and the debt ratings of Aviva. The outlook for the FSR remains stable and the outlook for the ICRs and debt ratings remains negative. (Please see link below for a detailed listing of the companies and ratings.)
Concurrently, A.M. Best has affirmed all ratings of Aviva Insurance Company of Canada and its affiliates.
The ratings of Aviva and its subsidiaries reflect the group’s strong risk-adjusted capitalisation, improving financial performance and very strong business profile in its core markets. The main rating drivers for the negative outlook on the ICRs are the group’s high, albeit reducing, debt leverage and capital fungibility constraints.
Aviva’s risk-adjusted capitalisation improved in 2013, primarily due to completion of the sale of its U.S. life operation. A.M. Best’s calculation of risk-adjusted capitalisation includes a significant contribution from unallocated divisible surplus, which mostly relates to participating funds in France and the U.K., the value of in-force business (an embedded value measure) and hybrid borrowings. Although the first two of these elements can be volatile and are subject to fungibility constraints, risk-adjusted capitalisation is expected to remain supportive of the ratings. Financial leverage, which in part results from the fungibility constraints, remains relatively high for the rating level. Management is committed to reduce external leverage in the medium term, although repayment of an internal loan from the main non-life subsidiary to a fellow group subsidiary is, in A.M. Best’s view, a nearer-term priority.
The financial performance has improved and is expected to improve further. However, profit before tax in the period after 2012 has translated into only small additions to group equity. In A.M. Best’s view, a stable environment would support a decline in external leverage over 2015 and 2016 toward the company’s target ratio. Aviva posted a profit before tax of GBP 1.1 billion for the six months to June 30, 2014, and equity increased by GBP 0.5 billion over the period. In 2013, Aviva reported profit before tax of GBP 2.8 billion due in part to the accounting treatment of the sale of its U.S. business. Equity decreased by GBP 0.3 billion after dividends, pension scheme charges and items related to the U.S. sale. Volatility in investment markets remains a risk to reported profits.
A revision of the outlook on the ICRs of Aviva to stable is likely if there is a clear reduction in financial leverage and continued improvement in financial performance. Negative rating actions could occur if Aviva’s financial leverage does not improve in line with expectations, risk-adjusted capitalisation deteriorates significantly or financial performance is consistently negative in the coming years.
For a complete listing of Aviva plc and its subsidiaries’ FSRs, ICRs and debt ratings, please visit Aviva plc.
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.
Key insurance criteria reports utilized:
• Analyzing Insurance Holding Company Liquidity
• Equity Credit for Hybrid Securities
• Insurance Holding Company and Debt Ratings
• Rating Members of Insurance Groups
• Risk Management and the Rating Process for Insurance Companies
• Understanding BCAR for Canadian Property/Casualty Insurers
• Understanding Universal BCAR
• Catastrophe Analysis in A.M. Best Ratings
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.
This rating announcement has been issued by A.M. Best Europe – Rating Services Limited, which is a subsidiary of A.M. Best Company. A.M. Best Company is the world's oldest and most authoritative insurance rating and information source. For more information, visit www.ambest.com.
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