Fitch Ratings has revised Aviva’s Outlook to Stable from Negative and affirmed its Long-term Issuer Default Rating (IDR) at ‘A’.
The rating actions reflect the recovery in Aviva’s capital position, driven by financial markets and balance sheet de-risking. By end-H110, total equity had increased to GBP15.8bn (end-2008: GBP14.6bn) and the surplus in Aviva’s with-profit (WP) funds, a major component in Fitch’s assessment of the group’s overall capital strength, had increased to GBP4.2bn (end-2008 2.3bn). By end-Q310, Aviva’s regulatory capital (Insurance Groups Directive; IGD) surplus had increased to GBP3.6bn (end-2008: GBP2.0bn).
The ratings reflect the group’s diversification across product lines, with a broad range of life, non-life and asset-management products, and across regions.
In January 2011, Aviva announced plans to reduce external debt by at least GBP700m in 2011-2013, which is a positive rating factor, given the group’s strong liquidity.
Fitch views Aviva’s rated US entities, Aviva Life and Annuity Company and Aviva Life and Annuity Company of New York, as ‘very important’ to the Aviva group (as defined in “Fitch’s Approach to Rating Insurance Groups”, dated 24 March, 2010 and available at www.fitchratings.com) and factors one notch of group support into their ratings.
Aviva’s US entities remain subject to the risk that the US is not granted third-country equivalence or transitional arrangements under the evolving European Solvency II regulatory regime due to take effect from early 2013. “In the absence of equivalence or transitional arrangements for the US, Aviva’s US entities might face higher capital requirements than their US-owned peers, and might therefore become less viable under continued ownership by a European parent,” says David Prowse, Senior Director in Fitch’s Insurance team in London. “However, Fitch remains of the view that if the US is not granted third-country equivalence, it will be granted transitional arrangements.”
Fitch views Aviva’s capital as strong, albeit lower than some similarly rated peers’. Capital depletion relative to peers on Fitch’s risk-adjusted assessment might lead to a downgrade, as might a fall in Aviva’s IGD surplus cover to below 140%, a 20% fall in shareholders’ equity or a decline in Aviva’s WP surplus to the extent seen during the financial crisis. Aviva has significant investment exposure to commercial property. Adverse developments in this asset class that lead to capital depletion on the scale indicated above could lead to a downgrade. Conversely, if Aviva managed capital to a higher level, as some peers do, with IGD surplus cover around 200% and the WP surplus levels maintained, the ratings might be upgraded.
Source : Fitch Ratings Press Release