A.M. Best Downgrades Ratings of AVIVA plc and Its Rated Subsidiaries; Rating Outlook Is Stable
A.M. Best Co. has downgraded the issuer credit rating (ICR) to “a-” from “a” of the non-operating holding company, AVIVA plc (AVIVA) (United Kingdom), and the financial strength rating (FSR) to A (Excellent) from A+ (Superior) and the ICRs to “a+” from “aa-” of its rated subsidiaries. A.M. Best also has downgraded the debt securities issued by AVIVA. The outlook for all ratings is stable. (See below for a detailed listing of the companies and ratings.)
The rating action follows the company’s negative bottom line financial performance and a reduction in risk-based capitalisation, resulting from investment losses of GBP 2 billion that the company reported in its 2008 results. The losses were incurred following the continuing equity market turmoil and widening credit spreads on its investment portfolio.
A.M. Best considers that, whilst part of the unrealised investment losses emanate from corporate bonds that the company expects to hold to maturity, the level of actual defaults (GBP 140 million [0.2% of the portfolio]) and impairments (GBP 260 million) incurred is significant. At the same time, the company increased provisions for further default losses on the assets backing its UK annuity portfolio by GBP 550 million, taking the total default provision for this business to GBP 1.1 billion, which represents 8% of the value of the portfolio.
Whilst the decision to strengthen the default provision and the current provision itself is in line with that of AVIVA’s peers, A.M. Best is concerned about the level of shareholders’ asset risk associated with AVIVA’s global corporate bond portfolio backing its life and GI businesses (amounting to GBP 26 billion), where the investment mix includes 30% of assets rated BBB or lower.
In A.M. Best’s opinion, despite the company’s low historical default experience on its GBP 12 billion UK commercial mortgage portfolio, future losses are more likely. This follows the deterioration of the portfolio’s loan to value ratio from 81% in June 2008 to 103% in December 2008, though interest service cover remains strong at 1.3 times.
In line with a number of life insurers in the United Kingdom, AVIVA’s risk-based capitalisation benefits significantly from soft elements such as value in force (VIF). Consequently, following significant reductions seen in the VIF in 2008, which in part reflects AVIVA’s adoption of market consistent embedded value (MCEV) reporting, and also factoring in the effect of investment losses on the level of AVIVA’s unallocated divisible surplus, the company’s overall capitalization decreased. A.M. Best also believes that AVIVA’s decision to maintain its dividend payments in 2008 puts further strain on its ability for a speedy return to its historical capital strength.
The ratings also take into account AVIVA’s diversified business profile, which is underpinned by its strong market position in the UK and European life insurance market, a growing presence in the United States, as well as its strong multinational general insurance business. AVIVA announced increased operating profits and new business sales growth of 11% to GBP 36 billion in 2008, partially attributed to currency movements, and that its market share in the UK life insurance market increased to 11.3% (10.5% in 2007). The company reported that from 2009, it is increasing its focus on balancing sales volumes against returns.
The FSR has been downgraded to A (Excellent) from A+ (Superior) and the ICRs to “a+” from “aa-” for the following member companies and key European entities of AVIVA plc:
AVIVA International Insurance Limited
Norwich Union Insurance Limited
Commercial Union Life Assurance Company Limited
CGNU Life Assurance Limited
Norwich Union Life and Pensions Ltd
Norwich Union Annuity Limited
Delta Lloyd N.V.
AVIVA Vida y Pensiones, S.A de Seguros y Reaseguros
AVIVA Italia Holding S.p.A.
AVIVA Assurances
AVIVA Courtage
AVIVA Vie
Societe d'Epargne Viagere
Eurofil
The rating has been downgraded to “a-” from “a” for the following senior debt issue:
AVIVA plc—
-- GBP 200 million 9.5% guaranteed bonds due 2016
The rating has been downgraded to “bbb+” from “a-” for the following subordinated debt issues:
AVIVA plc—
-- GBP 800 million 6.125% perpetual subordinated notes
-- EUR 800 million 5.75% step up subordinated notes, due 2021
<p>-- GBP 700 million 6.125% callable fixed rate reset subordinated bonds, due 2036
-- EUR 650 million 5.25% callable subordinated notes, due 2023
-- EUR 500 million 5.7% perpetual notes
-- USD 300 million floating rate subordinated notes, due 2017
-- GBP 400 million 6.875% callable fixed rate subordinated notes, due 2038
-- EUR 500 million 6.875% callable fixed rate subordinated notes, due 2018
-- GBP 200 million 6.875% callable fixed rate subordinated notes, due 2038
The rating has been downgraded to “bbb” from “bbb+” for the following direct capital instrument issues:
AVIVA plc—
-- GBP 500 million 5.9021% direct capital instruments redeemable 2020 or thereafter
-- EUR 700 million 4.7291% direct capital instruments redeemable 2014 or thereafter
The rating has been downgraded to “bbb+” from “a-” for the following indicative ratings on shelf securities:
AVIVA plc—
--senior subordinated notes
The rating has been downgraded to “bbb” from “bbb+” for the following indicative ratings on shelf securities:
AVIVA plc—
--junior subordinated notes
The FSR has been downgraded to A (Excellent) from A+ (Superior) and the ICRs to “a+” from “aa-” for the following life/health subsidiaries of Aviva USA Corporation:
Aviva Life and Annuity Company
American Investors Life Insurance Company, Inc.
Aviva Life and Annuity Company of New York
The ICR has been downgraded to “bbb+” from “a-” for Aviva USA Corporation.
The following debt ratings have been downgraded:
Aviva USA Corporation—
-- to “bbb+” from “a-” on $143.75 million 6.583% senior unsecured notes, due 2011
($20 million outstanding issued by the former AmerUs Group Co.)
Indianapolis Life Insurance Company—
-- to “a-” from “a” on $25 million 8.66% surplus notes, due 2011
The principal methodologies used in determining these ratings, including any additional methodologies and factors, which may have been considered, can be found at www.ambest.com/ratings/methodology.
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