S&P Lowers Aviva’s Canadian Subs to ‘A’

June 24, 2003

Standard & Poor’s Ratings Services announced that it has lowered its long-term counterparty credit and financial strength ratings on the primary operating subsidiaries of Toronto, Ontario-based Aviva Canada Inc. (formerly CGU Group Canada Ltd.) to ‘A’ from ‘A+.’ The bulletin also indicated that the ratings would “remain on CreditWatch with negative implications, where they were placed April 16, 2003.”

S&P said the ratings also applied to the primary operating subsidiaries of Aviva Canada. These include: Aviva Insurance Co. of Canada (formerly CGU Insurance Co. of Canada); Elite Insurance Co.; Pilot Insurance Co.; Scottish & York Insurance Co. Ltd.; and Traders General Insurance Co. (collectively known as Aviva Group Canada).

“The ratings actions follow Standard & Poor’s review of Pilot’s C$195 million [U.S. $143.4 million] (pretax) reserve strengthening and the unlocking of deferred premium acquisition cost (DAC) that was announced in April 2003, and its impact on both Pilot and Aviva Canada,” stated S&P credit analyst Donald Chu.

S&P noted that “The shortfall in Pilot’s historic claims reserving practices and DAC unlocking has resulted in the restatement of Pilot and Aviva Canada’s 2000, 2001, and 2002 financial statements and regulatory filings. On an after-tax basis, the adjustment represented about 40% of Pilot’s 2001 equity base, and around 10% of Aviva Canada’s 2001 equity base.”

The report explained that Aviva Group Canada represents the Canadian operating subsidiaries of the U.K’s Aviva PLC, and that S&P views them as “strategically important to Aviva.” The ratings therefore receive “implicit support” from the parent company.

“Aviva Canada is one of the leaders in the Canadian property and casualty (P&C) sector with its 9% market share position, which is strongly supported by its well-established distribution channels and diversified product lines,” said S&P. “As of Dec. 31, 2002, Aviva Canada had gross premiums of C$2.6 billion [U.S. $1.91 billion], general assets of about C$5.9 billion [U.S. $4.34 billion], and a total shareholder equity base of slightly more than C$1.0 billion [U.S. $736 million]. Aviva Canada contributes 10% of worldwide general insurance premiums and about 3% of the group’s total gross premiums.”

S&P indicated that the “the maintenance of the CreditWatch placement reflects the fact that Pilot’s and Aviva Canada’s restated financial statements have not yet been finalized. Considering these statements have been under review by the company’s internal and external auditors, its U.K. parents, and the Canadian regulators since April 2003 when the situation with Pilot was first uncovered, Standard & Poor’s does not expect to see any material changes in these draft financial statements. The CreditWatch placement reflects the potential for a further lowering of the ratings if Pilot’s total historic claims reserving practices and DAC unlocking are materially greater than C$195 million [U.S. $143.4 million].”

“Subject to no material changes being made to these financial statements, it is Standard & Poor’s expectation that the CreditWatch placement would be removed, and the ratings would be affirmed with a negative outlook,” the announcement concluded.

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