A.M. Best Europe – Rating Services Limited has affirmed the financial strength rating (FSR) of ‘A’ (Excellent) and issuer credit ratings (ICR) of “a+” of the insurance subsidiaries of UK-based AVIVA plc and the ICR of “a-” of AVIVA and the ICRs of all debt securities. The outlook for the FSR remains stable and the outlook for the ICRs remains negative.

Best also affirmed all ratings of Aviva Insurance Company of Canada and its affiliates.

Best explained that the main rating drivers for the negative outlook on AVIVA’s ICR “are the high debt leverage, the volatility of financial results and the significant senior managerial changes in this transitional period for the group. The main drivers for the rating affirmations are AVIVA’s strong risk-adjusted capitalization, improving financial performance and more focused business profile.”

The model, used by Best to analyze the ratings, established that “AVIVA’s risk based capital has improved significantly both at year-end 2012 and half-year 2013 due to better-performing financial markets, as well as a material decline in intangibles and deferred acquisition costs (DAC).

“The reduction of intangibles and DAC is primarily linked to AVIVA’s sale of the US life business in early October 2013. Risk-adjusted capitalization is supported by various components such as the credit default provision, the fund for future appropriations, the value in-force (an embedded value measure) and hybrid borrowings. Any significant fluctuation of these elements could weaken AVIVA’s capital position.”

Best indicated, however, that it “expects capitalization to remain supportive of the ratings. Although financial leverage remains high for the rating level, management is committed to reduce it in the medium term.”

The report also notes that “AVIVA posted a profit before tax of £1.1 billion [$1.77 billion] as at June 2013, after a loss of £3 billion [$4.826 billion] at year-end 2012 due to the accounting treatment of the sale of its US business. Results have the potential to remain volatile while AVIVA transitions into a leaner and more focused insurer.”

In conclusion Best said: “Positive rating movements are unlikely unless there is a clear reduction in financial leverage and stabilization in the improved capital position.

“Negative rating actions could occur if AVIVA’s financial leverage were not to improve, risk-adjusted capitalization were to deteriorate significantly or financial performance was consistently negative in the coming years.”

A complete listing of AVIVA plc and its subsidiaries’ FSRs, ICRs and debt ratings is available from A.M. Best.

Source: A.M. Best Europe