AM Best has affirmed the Financial Strength Rating (FSR) of A (Excellent) and the Long-Term Issuer Credit Ratings (Long-Term ICR) of “a+” of the rated insurance subsidiaries of Aviva plc (United Kingdom). Concurrently, AM Best has affirmed the Long-Term ICR of “a-” of Aviva plc (Aviva), the group’s non-operating holding company. At the same time, AM Best has affirmed all Long-Term Issue Credit Ratings (Long-Term IRs) on debt instruments issued or guaranteed by Aviva. The outlook of these Credit Ratings (ratings) is stable. (See below for a complete listing of companies and ratings.)
The ratings reflect Aviva’s balance sheet strength, which AM Best categorises as very strong, as well as its strong operating performance, favourable business profile and appropriate enterprise risk management.
Consolidated risk-adjusted capitalisation, as measured by Best’s Capital Adequacy Ratio (BCAR), is assessed at strongest. However, there are fungibility constraints and most of the group’s capital continues to be located in its life subsidiaries.
AM Best’s assessment of risk-adjusted capitalisation for the group includes a significant contribution from unallocated divisible surplus, economic value in the group’s life segment that is not reflected in IFRS reporting and hybrid borrowings. Although the first two of these elements can be volatile, AM Best expects risk-adjusted capitalisation to remain at a level supportive of the ratings. The group is pursuing a capital light new business strategy in the life segment, with the exception of expansion in U.K. annuities, and its external dividend policy has been adjusted away from the previous target of a 55% to 60% payout ratio by 2020 to an approach in which the dividend is expected to increase with earnings. AM Best’s expectation is that the release of capital from mature activities and management actions will accommodate the group’s external dividend and coupon payments and allow a degree of flexibility for the recently appointed chief executive to manage the future shape of the group.
Aviva is obtaining strong returns from a mature profile of activities. Whilst AM Best’s five-year average return on capital for the company is 8.0%, removing intangible items from both profit and capital lifts the return for 2017 and 2018 to a mid-teens level. Income from the group’s U.K. with-profit and unit-linked non-pensions back books are declining and Aviva’s Canadian non-life earnings are expected to remain depressed in 2019 compared with historical performance. However, AM Best expects that longevity releases from the U.K. annuities back book, expansion of U.K. pension-related sales, including bulk annuities, growth in the international operations and a more visible recovery in Canadian non-life profit in 2020 and after, will be sufficient to provide the group with mid-single digit percent operating profit growth over the medium term.
The diverse range of operations across life and non-life, and across territories is a positive rating factor for the group’s business profile. The group has leading market positions in the United Kingdom and Canada, significant operations in France, Italy and Poland and growth opportunities in certain emerging markets. However, the increasing importance of U.K. pension-related earnings, whilst it reflects a business opportunity, also increases the public policy risk.
The FSR of A (Excellent) and the Long-Term ICRs of “a+” have been affirmed with a stable outlook for the following subsidiaries of Aviva plc:
- Aviva Insurance Limited
- Aviva International Insurance Limited
- Aviva Insurance Company of Canada
- Elite Insurance Company
- Traders General Insurance Company
- Pilot Insurance Company
- Scottish & York Insurance Company, Limited
- S&Y Insurance Company
The following subordinated Long-Term IRs have been affirmed with a stable outlook:
-- “bbb+” on GBP 450 million 6.625% callable subordinated notes, due 2041
-- “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 GBP 600 million 6.875% callable fixed rate subordinated notes, due 2058
The following direct capital instrument Long-Term IRs have been affirmed with a stable outlook:
-- “bbb” on GBP 500 million 5.9021% direct capital instruments redeemable 2020 or thereafter
The following indicative Long-Term IRs on shelf securities have been affirmed with a stable outlook:
-- “bbb+” on senior subordinated notes
-- “bbb” on junior subordinated notes
This press release relates to Credit Ratings that have been published on AM Best’s website. For all rating information relating to the release and pertinent disclosures, including details of the office responsible for issuing each of the individual ratings referenced in this release, please see AM Best’s Recent Rating Activity web page. For additional information regarding the use and limitations of Credit Rating opinions, please view Understanding Best’s Credit Ratings. For information on the proper media use of Best’s Credit Ratings and AM Best press releases, please view Guide for Media - Proper Use of Best’s Credit Ratings and AM Best Rating Action Press Releases.
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